As an alternative to normal salary payment, a company can remunerate its employees with warrants/stock options which then can be converted to shares in the company. In that way, the employee gets a bigger incentive to care about the development in the company.
However, although warrants/stock options are also fairly used as variable remuneration in Denmark, the Danish rules regarding warrants involves some terms that the company should be aware of. In this newsletter, these overall rules for warrants/stock options will be treated.
What is a warrant/stock option?
In short terms, a warrant is a right - not an obligation – to subscribe new shares in a company at a specific time (or period) to a price set out beforehand. A stock option is similar to this, but with the difference what it involves a right to purchase already issued shares in a company. Thus, in reality these are the same.
Warrants/stock options are, in other words, a remuneration in something else than money (salary) as the payment is in (possible) shares in the company. If the employee wishes to exercise his/her right, the company is required to issue new shares or sell already issued shares to the employee.
Warrants/stock options are regulated by the Danish Stock Option Act (in Danish: "Aktieoptionsloven") (hereinafter "the DSOA"). The main requirement for the act to apply is that the person who is granted warrants/stock options is an employee, i.e. not a managing director or a board member. Such persons can also be awarded warrants/stock options, but in that case warrants/stock options will not be covered by the rules in the DSOA.
If a warrant/stock option programme is covered by the DSOA, the DSOA requires that a written statement in Danish of the main element of the program is given to the employee as a part of the employment contract (In Danish: "Arbejdsgivererklæring").
There are in general terms four important times in relation to a warrant/stock option:
- The granting: When the employee is given the warrants/stock options.
- The vesting: When the warrants/stock options are vesting, i.e. the employee cannot do anything until they have vested.
- The exercise: When the employee decides to exercise his warrants/stock options and buy shares in the company.
- The sale: When the employee sells the shares.
What happens in relation to a termination?
The DSOA treats employees whose employment ceases differently depending on whether the employee is considered a "good leaver" or a "bad leaver". This distinction determines whether the employee is entitled to keep the granted warrants/stock options or not in relation to a termination.
A "good-leaver" is an employee who is terminated by the employer (unless the termination was justified by the actions or omissions of the employee), whereas a "bad-leaver" is an employee which terminate his employment (unless the company's omission to fulfill its obligations towards the employee made is it justified for the employee to terminate the employment).
Good leavers are entitled to continuous vesting and exercise of their warrants warrants/stock options which have been granted as if they had not left the position. In addition, they are also entitled to a proportionate part of additional grants which they would have been granted if they were still employed.
On the other hand bad leavers are not entitled to keep any granted warrants/stock options (that is unless these have already been exercised and thus are shares), and they are not entitled to any proportionate part of additional grants.
Therefore, it is advisable to grant warrants/stock options retrospectively (back in time) (as with normal salary) as oppose to in advance. If the warrants/stock options are all granted in advance, the good leaver will be entitled to keep all the warrants/stock options and exercise these when these have vested.
Often companies are not aware of this difference and therefore get surprised that the employee who is a good leaver is entitled to keep and exercise already granted warrants/stock options and also to receive a proportionate part of additional grants in the future.
One way to meet this issue is in the way the warrant/stock option program is set up; the shorter a granting period, the less the company is obliged to in relation to good leavers meaning that if the employee is only granted warrants/stock options on e.g. a yearly basis (retrospectively), he/she will only be entitled to the grants for the months until resignation. In this way the grants for the good leaver is limited via the program.
The employee is granted 250 warrants/stock options per year for a period of 4 years, i.e. 1000 warrants/stock options in total. If the employee resigns after 1.5 year as a good leaver, he/she will only be entitled to keep 375 warrants/stock options, i.e. 250 warrants from year 1 and ½ of the warrants/stock options from year 2.
If the employee had been granted all 1000 warrants/stock options at one time from the beginning, the employee would be entitled to keep all 1000 warrants.
However, the more often the granting happens, the more heavy the administrative burden for the company will be. Thus, each time a granting happens this must be decided on a general meeting and added to the company's articles of association. We therefore recommend that the granting happens at the time of the yearly general meeting where other things most likely are voted through.
The Danish rules on warrants/stock options can be quite difficult and can require a lot of administrative work if the warrant/stock option program is not set up in the right way. We therefore recommend that you contact us if you are considering offering warrants/stock options to your employees.
Contrasts between Swedish and Danish legislation
(Comments provided by Bird & Bird's employment team in Sweden)
In Sweden, incentives such as stock option programs are usually a good way to reward and increase employee loyalty and commitment towards the company. Swedish law divides incentive programs into three different groups; (1) Securities (e.g. Shares), (2) Non-securities, but with a right to acquire securities (e.g. ordinary Stock Options (Sw. Personaloptioner)) and (3) Non-securities, without a right to acquire securities (e.g. synthetic options). However, an option program that has been wrongfully implemented may lead to unforeseen and undesirable tax consequences, both for the employer and the employee. We therefore recommend that you contact us if you intend to offer incentive programs to your employees.
Contrasts between Finnish and Danish legislation
(Comments provided by Bird & Bird's corporate team in Finland)
In Finland, stock options are widely used especially in start-ups and stock-listed companies as a way to incentivize and reward employees. Stock options are regulated under the Finnish Companies Act and have to be registered officially in order to be valid. In addition to these regulative requirements, typically the Company and the stock option holder agree on various issues relating to the stock options in a separate stock option agreement. If stock options have been granted based on an employment relationship, such stock options are regarded as employee stock options and are taxable as salary. In order to comply with the various legal requirements and to limit the risks in connection with the issuing of stock options, we strongly recommend that you contact us for further advice on the matter.