Malus and LTIP awards

June 5, 2018

The UK Corporate Governance Code states that long-term incentive plans (LTIPs) must include provisions to enable the company to withhold payments to participants in specified circumstances. It is now common for LTIP Rules to allow the Remuneration Committee to apply these ‘malus’ provisions and also to ‘claw back’ the benefit of awards which have already vested and been paid to the participants. The circumstances may include misconduct of the participant, misstatement of the company’s results and situations which have caused reputational damage to the company.
In a recent case (Daniels v Lloyds Bank Plc), the High Court decided that a new malus clause, added to LTIP Rules, could not apply to awards which had already been granted before the amendment was made. The court also concluded that the Board of Directors could not decide that no shares should be delivered to the participants at all after the Remuneration Committee had determined the level of vesting. This ruling was based on the actual circumstances and may not be applicable to other plans. However, companies will need to ensure that malus and clawback provisions are carefully worded and that proper processes are used if they are ever applied.

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