Art. 36 of the Danish Contracts Act did not set aside the repurchase clause in the stock program

A company had sold a number of shares to the CEO as a part of the company’s stock program. A term of the stock program was a repurchase clause stating that the repurchase price depended on whether the employee was a good leaver or a bad leaver by his resignation. According to the agreement the CEO would receive approx. DKK 12 million for his shares as a good leaver, but only approx. DKK 3 million as a bad leaver.

After the CEO’s resignation the company found out that the CEO had violated his employment agreement severely. Consequently, the company was of the opinion that the CEO was not entitled to the good leaver-repurchase price, that he had already received. For that reason the company demanded the difference repaid.

The Supreme Court: The bad leaver clause was not unreasonable

Both the Maritime- and Commercial Court and the Supreme Court found that the bad leaver-provision of the repurchase clause could not be set aside by art. 36 of the Contracts Act, because it – under the circumstances – was neither unreasonable nor contrary to good faith to make it applicable to the CEO.

Therefore, both courts found that the CEO had to repay the difference between the good leaver price and the bad leaver price.

The judgment is interesting because it concerns a stock program not covered by the Danish Stock Option Act and the Danish Salaried Employees Act. Furthermore, it is in line with the previous Exiqon-judgment of 2003, where the Maritime- and Commercial Court overruled an unreasonable repurchase clause by art. 36 of the Contracts Act, because the clause did not contain a distinction between a good leaver and a bad leaver.

It has since been assumed that a bad leaver-clause validly can be included in these types of stock programs, which the Supreme Court has now made clear.

IUNO’s opinion

It is important that companies carefully asses what rules their stock programs and incentive schemes are covered by before the programs and schemes are introduced to the employees. Even though a stock program is only offered to the CEO it does not mean that there is freedom of contract as the provisions of the program may be unreasonable.

Furthermore, IUNO recommends that – prior to any termination – companies examine whether the employee or the CEO are covered by a stock program or incentive scheme, so that the company is prepared on how to handle stock program or incentive scheme in connection with the termination.

[Judgment given by the Supreme Court of Denmark on 28 April 2014 – case 162/2012]