HR Legal

New bill on the way: More freedom of contract in stock option plans

18 September 2018

The Danish Ministry of Employment has sent a draft bill on changes to the Danish Stock Option Act in external consultation. The bill introduces substantial changes compared to the current Act, including an increased freedom of contract in stock option plans, which in the future will allow the parties to agree that “good leavers” will lose options and warrants which have been granted, but not yet exercised at the time of termination.

In November 2017 the Danish government presented a series of business and entrepreneur initiatives, which we have previously addressed here (In danish). These initiatives have now resulted in a draft bill, which will amend the current Stock Option Act and introduce more clarity and provide more freedom of contract when using stock-option plans.

No distinction between “good leavers” and “bad leavers” at termination

The starting point under the current Stock Option Act is that “good leavers” maintain options and warrants which have been granted, but not yet exercised, while “bad leavers” do not. In addition, “good leavers” have the right to a proportional share of the grant, which they would have had the right to, had they been employed at the end of the fiscal year or at the time of grant.

The new bill will allow the parties to agree that also “good leavers” will forfeit the right to options and warrants which have been granted, but not yet exercised.

According to the explanatory notes, the draft is only intended to increase the freedom of contract in relation to stock options plans and it will therefore still be possible to enter into agreements reflecting the current Stock Option Act.

Repurchase of stocks at market price

The bill allows the employee and the employer to agree that upon termination of the employee, the employer can repurchase stocks and shares, which are subject to the Act, at market price. The current clause in the Stock Option Act prohibiting derogations to the detriment of the employee remains in force, and the clause on repurchase of stocks can therefore not be derogated from to the detriment of the employee. This means that the parties cannot agree that at the time of the termination the shares can be repurchased to a price less than market price or to a fixed amount. However, the parties can freely agree that stocks and shares are repurchased at a higher value than market price, as such derogation would benefit the employee.

According to the draft bill, an agreement of repurchase requires that there is a basis to determine the market price for the stocks or shares in question. If the agreement concerns stocks or shares, which pursuant to the applicable plan are non-transferable on the open market, a repurchase clause would not be executable. In this case, the repurchase must be done in accordance with “regular contractual principles, as determined in the Danish Contracts Act and as developed in case law”.

If the bill is passed, the changes enters into force on 1 January 2019 and will apply to plans established after this date.

IUNO’s opinion

The bill will increase the flexibility of stock option plans, especially in connection with the termination of employees, and this may make it significantly more attractive for companies to use employee stock options as a part of the renumeration.

However, the bill includes some unclarities. According to the explanatory notes, the intention of removing the current distinction between “good leavers” and “bad leavers” in relation to the termination of an employee is to introduce freedom of contract for the parties. But it remains unclear if the possibility to agree more freely is limitless, for example excluding the regular principles of the Danish Contracts Act.

Although the bill will allow employers to repurchase stocks and shares at market price, it is not determined how the market price should be calculated. This may present a problem, as it causes uncertainty in relation to determining market price, for example for unquoted companies. It is also unclear how stocks and shares, which pursuant to the plan are non-transferable on the open market, should be regulated. The Danish courts have previously addressed the question of the employer’s repurchase of stocks and shares, but these cases have been examined under the principles of the current Stock Option Act. It is therefore not clear if the explanatory notes refer to the existing case law or to other principles.

Finally, the bill will only apply to plans established after the entry into force of the amended Act. This wording is unclear in relation to existing plans where the grant of stocks and shares takes place after the amended act has entered into force. The question therefore remains, whether it is sufficient to amend an existing plan for it to be considered as established after the entry into force of the Act and thereby being subject to the amended Act.

We will follow any developments in relation to the bill closely and return with updates.

[Ministry of Employment draft to “Bill on the amendment of the Stock Option Act”]

Note: The bill on changes to the Danish Stock Option Act was passed in unchanged form and only with a few clarifications in the explanatory notes. Therefore, there are still some situations or circumstances where the law is unclear. The law entered in to force on 1 January 2019.

In November 2017 the Danish government presented a series of business and entrepreneur initiatives, which we have previously addressed here (In danish). These initiatives have now resulted in a draft bill, which will amend the current Stock Option Act and introduce more clarity and provide more freedom of contract when using stock-option plans.

No distinction between “good leavers” and “bad leavers” at termination

The starting point under the current Stock Option Act is that “good leavers” maintain options and warrants which have been granted, but not yet exercised, while “bad leavers” do not. In addition, “good leavers” have the right to a proportional share of the grant, which they would have had the right to, had they been employed at the end of the fiscal year or at the time of grant.

The new bill will allow the parties to agree that also “good leavers” will forfeit the right to options and warrants which have been granted, but not yet exercised.

According to the explanatory notes, the draft is only intended to increase the freedom of contract in relation to stock options plans and it will therefore still be possible to enter into agreements reflecting the current Stock Option Act.

Repurchase of stocks at market price

The bill allows the employee and the employer to agree that upon termination of the employee, the employer can repurchase stocks and shares, which are subject to the Act, at market price. The current clause in the Stock Option Act prohibiting derogations to the detriment of the employee remains in force, and the clause on repurchase of stocks can therefore not be derogated from to the detriment of the employee. This means that the parties cannot agree that at the time of the termination the shares can be repurchased to a price less than market price or to a fixed amount. However, the parties can freely agree that stocks and shares are repurchased at a higher value than market price, as such derogation would benefit the employee.

According to the draft bill, an agreement of repurchase requires that there is a basis to determine the market price for the stocks or shares in question. If the agreement concerns stocks or shares, which pursuant to the applicable plan are non-transferable on the open market, a repurchase clause would not be executable. In this case, the repurchase must be done in accordance with “regular contractual principles, as determined in the Danish Contracts Act and as developed in case law”.

If the bill is passed, the changes enters into force on 1 January 2019 and will apply to plans established after this date.

IUNO’s opinion

The bill will increase the flexibility of stock option plans, especially in connection with the termination of employees, and this may make it significantly more attractive for companies to use employee stock options as a part of the renumeration.

However, the bill includes some unclarities. According to the explanatory notes, the intention of removing the current distinction between “good leavers” and “bad leavers” in relation to the termination of an employee is to introduce freedom of contract for the parties. But it remains unclear if the possibility to agree more freely is limitless, for example excluding the regular principles of the Danish Contracts Act.

Although the bill will allow employers to repurchase stocks and shares at market price, it is not determined how the market price should be calculated. This may present a problem, as it causes uncertainty in relation to determining market price, for example for unquoted companies. It is also unclear how stocks and shares, which pursuant to the plan are non-transferable on the open market, should be regulated. The Danish courts have previously addressed the question of the employer’s repurchase of stocks and shares, but these cases have been examined under the principles of the current Stock Option Act. It is therefore not clear if the explanatory notes refer to the existing case law or to other principles.

Finally, the bill will only apply to plans established after the entry into force of the amended Act. This wording is unclear in relation to existing plans where the grant of stocks and shares takes place after the amended act has entered into force. The question therefore remains, whether it is sufficient to amend an existing plan for it to be considered as established after the entry into force of the Act and thereby being subject to the amended Act.

We will follow any developments in relation to the bill closely and return with updates.

[Ministry of Employment draft to “Bill on the amendment of the Stock Option Act”]

Note: The bill on changes to the Danish Stock Option Act was passed in unchanged form and only with a few clarifications in the explanatory notes. Therefore, there are still some situations or circumstances where the law is unclear. The law entered in to force on 1 January 2019.

Receive our newsletter

Anders

Etgen Reitz

Partner

Søren

Hessellund Klausen

Partner

Kathrine

Skøtt Jespersen

Senior associate

Kirsten

Astrup

Associate

Similar news

logo
HR legal

26 April 2019

Swedish Labor Court imposes a 6 months notice for a CEO who terminated his employment

logo
HR legal

29 March 2019

The Labor Court: Short-term employees will transfer with seniority

logo
HR Legal

15 February 2019

Employee was entitled to holiday allowance of commission

logo
HR Legal

24 January 2019

The new Holiday Act part 1: The transition period

logo
HR Legal

21 December 2018

Overview: Employment and employee benefits in Denmark

logo
HR Legal

12 December 2018

IUNOs HR Legal App has become a HR Wiki

Events

logo
HR Legal
3 December 2018

International HR Legal Day 2018

logo
HR Legal
3 December 2018

Seminar on development and employment forms (english)

logo
HR Legal
21 November 2018

Seminar on Employee Influence in the Nordics (Helsinki)

logo
HR Legal
20 November 2018

Seminar on Employee Influence in the Nordics (Copenhagen)

logo
HR Legal
20 November 2018

Seminar on Employee Influence in the Nordics (Webcast)

logo
HR Legal
13 November 2018

Seminar on Employee Influence in the Nordics (Oslo)