Newsletter – More freedom of contract in the drafting of stock option schemes etc.

The amendment to the Danish Stock Option Act was adopted by the Danish Parliament on 6 December 2018. The adopted bill has been mentioned previously in our newsletter of 31 August 2018. As from 1 January 2019, the amendment abolishes the existing restrictions on what can lawfully be agreed in connection with termination of an employment. As part of a stock option scheme it will now be possible to agree that shares can be repurchased at market value, see details below. The amendment of the Stock Option Act enters into force on 1 January 2019. 
The purpose of the amendment is to support the application of stock options and/or warrants by simplifying the rules in order to provide clarity and facilitating a higher degree of flexibility when drafting such share incentive schemes.
Applicable law 
Today, the Stock option Act contains mandatory provisions governing the position of employees in connection with termination, for example the issue of when an employee is entitled to keep granted share-based salary in the form of stock options and/or warrants etc. (”Options”).
The amendment means, inter alia, that two current principal provisions of the Stock Option Act (sections 4 and 5) are deleted and a new section 4 is implemented which is to regulate the repurchase of shares. Sections 4 and 5 of the current Stock option Act differentiate between whether an employee is a so-called ”bad leaver” or a ”good leaver”. The distinction between the two is vital for whether an employee is entitled to keep his/her Options in connection with termination of the employment, because a ”good leaver” is entitled to keep all granted Options, also non-vested Options, in connection with the termination of his/her employment. Furthermore, a “good leaver” employee has the right to a proportionate share of the next grant. For a ”bad leaver”, however, the right to all granted Options which have not been exercised at the time of termination lapses unless otherwise agreed.
Under the current rules, an employee who terminates his/her employment, who is dismissed or whose employment is lawfully terminated due to breach is regarded as a ”bad leaver”, whereas an employee whose employment is terminated by the employer without such termination being caused by breach, or who resigns due to retirement, is regarded as a ”good leaver”.
Freedom of contract
The statutory regulation of the terms when terminating the employment of an employee, and consequently the distinction between a ”good leaver” and a ”bad leaver”, has been abolished by the amendment. This means that there is full freedom of contract in connection with termination of the employment. However, it should be noted that section 36 of the Danish Contracts Act regarding unfair agreements will continue to be applicable also in relation to option schemes etc.
With full ”freedom of contract” it will be possible to agree that Options etc., which at the time of termination have not yet been vested will lapse regardless of the reason for the termination of the employment, also regardless of whether the employment is not terminated due to breach.
The amendment of the Stock Option Act means that in future companies always have to decide what must happen on termination of an employment. However, for many companies freedom of contract will mean an administrative relief because option schemes have always been organized so that formal grants have taken place once a year in order to limit the number of Options to be kept by the employees if the company terminates the employment.
Repurchase clauses – The employer’s repurchase of shares acquired as part of an option scheme
Pursuant to the new provision in section 4 of the Stock Option Act, the employee and the employer cannot agree that the employer, upon the employee’s termination of the employment, can repurchase share acquired under an option scheme comprised by the Stock Option Act at a lower price than the market price. The provision cannot be derogated from to the detriment of the employee.
Conversely, the provision means that agreements may be entered into to the effect that an employer can repurchase shares at market price upon termination.
The determination of the market price has not been considered. According to the explanatory notes to the Act, it will not be possible in advance to determine a specific amount for which the employer may repurchase shares. However, it will be possible to agree on a higher price than the market price. It is also stated that an agreement on repurchase under an option scheme comprised by the Stock Option Act presupposes that there is basis for determining the market price of the shares in question at the time of repurchase, and if the shares in question are non-negotiable on the open market, a clause on repurchase at market price cannot be carried into effect. Finally, according to the explanatory notes to the Act, any repurchase under an option scheme in connection with termination may take place in accordance with general principles of the law of contract, meaning that any repurchase requires consensus.
According to the explanatory notes, repurchase clauses can only be applied if the shares are or will become ”negotiable on the open market”. This leaves some doubt as to whether repurchase clauses are applicable as part of option schemes in unlisted companies and when the requirement of negotiability has been complied with. Unfortunately, the explanatory notes create an unnecessary ambiguity regarding the understanding of an otherwise clear statutory provision.
The amendment of the Stock Option Act will take effect for option schemes established after 1 January 2019. Existing schemes will continue to be applicable. The Act modifies the existing requirements and consequently there will be no requirement for adjustment of existing option schemes, but on the other hand there may be a wish to modify existing Option schemes. Such modifications must be given careful consideration. This also applies to any amendments of shareholders’ agreements etc. given that the new provisions also open up to an adjustment of the relationship between employee and employer in relation to acquired shares when exercising rights under Option schemes.
 
For additional information and advice please contact Henriette la Cour, Attorney-at-law/hlc@nrlaw.dk
 
 

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