The Danish Parliament has passed a bill amending the rules in the Danish Stock Option Act to the effect that more freedom of contract is allowed as to the terms of a stock option programme. The rules will come into force on 1 January 2019.
The bill passed on 6 December 2018 by the Danish Parliament is the implementation of a political agreement on business and entrepreneurial initiatives entered into between the Danish People's Party (Dansk Folkeparti) and the Danish Social Liberal Party (Radikale Venstre) on 12 November 2017. The amendments of the Stock Option Act i.a. entail that the current "main provisions" in sections 4 and 5 of the Stock Option Act currently in force will be deleted and replaced by a new section 4.
Current law in force
The current rules in sections 4 and 5 of the Stock Option Act distinguish between the so-called "bad leaver" and "good leaver" situations of an employee. If an employee resigns himself, or if his employment contract is terminated, or he is summarily dismissed due to breach by the employee, such employee is a "bad leaver". But if the employment contract is terminated by the employer and such termination is not due to breach by the employee or if the employee resigns due to retirement, such employee is a "good leaver".
The distinction between these situations decides whether the employee is entitled to keep the stock options granted in connection with the termination of the employment since a "good leaver" is entitled to keep granted, but not exercised stock options in connection with the resignation along with a proportionate part of future allocations, see section 5. However, the right to granted and not exercised stock options for a "bad leaver" lapses automatically, see section 4, unless otherwise expressly stated in the agreement.
The amendments entail that these limitations no will longer apply allowing for the employer and the employee to freely decide on the terms of stock options in connection with a termination of the employment. The employer may therefore determine such terms to the effect that non-exercised stock options will lapse in connection with a termination of the employment regardless of the reasons for the termination of the employment, i.e. also regardless of the employee being a "good leaver" according to the current rules.
In addition thereto, the amendments introduce the option to agree on a repurchase of the shares as long as the market price is applied. In that way, the existing insecurity relating to the option of agreeing on terms on the repurchase of shares from a "good leaver" is now eliminated as the Act will entitle the parties to enter into such an agreement. Section 4 has the wording as follows:
Section 4. The employee and the employer may agree that the employer in connection with the resignation of the employee may repurchase the shares acquired as part of a programme or an agreement pursuant to section 1 at market price.
However, it appears from the explanatory remarks to the bill that in case it involves shares "which under the programme/agreement are not transferable on the open market", such a clause regarding repurchase cannot be brought into effect. In such a situation, any repurchase in connection with a termination of the employment may take place in accordance with regular contract law principles as set out by the Danish Contracts Act and developed through case law.
The remark stating that the shares "under the programme/agreement" are not transferable on the open market refers according to the Danish Ministry of Employment to the situation where the employer as part of the programme/agreement (i.e. the stock option programme) has included a term to the effect that the employee may neither transfer his options nor shares to any third party (not even at market price). In other words; a clause imposing a limitation of transferability on the employee.
In case of any such clause, a repurchase clause can generally not be brought into effect unless it has been agreed in connection with the termination and if such an agreement may be deemed reasonable.
The new rules will come into force on 1 January 2019 and will only apply to new employee stock programmes, i.e. programmes made after 1 January 2019. Existing arrangements will still have to comply with the current rules and may generally not be changed.
Bird & Bird's comments:
- The amendments entail a radical change of the rules currently in force and will leave employers in a much more favourable position than today as employees may be stripped of their rights to stock options in all employment termination situations.
- Furthermore, the option to agree on repurchase leaves the employers in a much more favourable position than today even though the bill involves a great deal of uncertainty relating to any such repurchase.
- An employer must i.a. consider whether a clause on the transferability in the option programme or a repurchase clause pursuant to section 2 will prevail since a transferability clause under the arrangement – according to the explanatory remarks of the bill – may hinder an agreement on repurchase pursuant to section 4 of the act.
- The requirement for the repurchase to take place at market price may also seem undesirable in a situation where the employee has materially breached the employment contract.
- In the preparatory work on the bill, the Ministry of Employment stated that the amendment of the act does not include programmes entered into prior to the effective date of the act (1 January 2019), and furthermore that it is "not the intention of the bill to limit the access to set aside an agreement if it is deemed unreasonable, see section 36 of the Contracts Act." With the limitation of the access to repurchase suggested by the bill, it may be considered if the Ministry of Employment based on this expresses an opinion of the current law which is critical of the validity of repurchase clauses – including the clauses outside the stock option area.1
1 The validity of repurchase clauses is i.a. decided in the Danish Law Gazette (UfR) 2011.2654H (employee shares purchased at market price), and in UfR 2011.193H and UfR 2011.203/1, /2 og /3H (all employee shares purchased at a discount), it has been decided whether such employee shares are subject to section 17a of the Danish Salaried Employees' Act.