ETASSUM44290 - Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Alterations to performance conditions

If the scheme rules provide for subsequent variation or waiver of performance conditions, there must also be objective criteria which limit the directors’ discretion to do so. This means including objective machinery directing when and to what extent the performance targets can be amended.

The provisions in the Burton Group scheme (ETASSUM47250) were acceptable because targets could only be varied:

• when events happened which caused the directors to consider that a different condition would be a fairer measure of the performance of the job-holder,
• to the extent that the directors reasonably considered would result in the condition being less difficult to satisfy than it would have been without such amendment.

But there will be other forms of objective machinery which are acceptable. For example, a requirement that the amended conditions should be no more nor less difficult to satisfy (i.e. the effect must be neutral) would be just as objective.

Some scheme rules may include provision for setting additional conditions, but be silent on whether they can be amended or waived subsequently. This does not prevent the terms of the additional conditions themselves, when set by the directors (within the objective guidelines required by the rules), from building in provision for their subsequent waiver or variation. But additional conditions set (including any terms relating to their waiver or variation) will have to comply with whatever “objective machinery” has been included for that purpose in the Schedule 4 CSOP scheme rules. If an option-holder disputes that the directors have acted within the objective guidelines in the scheme rules that is a matter between the parties to the option contract (the scheme organiser (grantor) and the option-holder). The Schedule 4 CSOP scheme rules should be sufficiently clear to enable the option-holder to contest whether the directors’ actions are legally authorised, if he or she so wishes.