A Supreme Court judgment of 23 June 2011 has set aside a buy-back clause as invalid with regard to an employee who had been dismissed.
Background
The case pertained to a share purchase programme established for the benefit of the executive employees in an international company headquartered in Luxembourg. During his employment with the company’s Danish subsidiary, the employee in question had received an offer to purchase shares in the parent company domiciled in Luxembourg.
Under the terms and conditions of the share purchase programme, it was an essential condition that in the event of termination of the employment relationship the employees were under an obligation to sell back the shares at either the market price or the purchase price depending on the point in time and the reason for such termination. The obligation of the employees to sell back the shares could be relied on irrespective of whether the resigning employee was ”Bad Leaver” or ”Good Leaver”.
The issuing company was not correspondingly obligated to acquire the shares of the employees, thus providing the company with a unilateral right to buy back such shares.
The employment relationship in question had been terminated by the Danish subsidiary without any breach on the part of the employee (Good Leaver). In connection with the termination, the employee in question objected to the validity of the buy-back clause.
The Supreme Court judgment
The Supreme Court found that neither s 17a of the Danish Salaried Employees Act (funktionærloven) nor the Danish Share Option Act (aktieoptionsloven) applied, but that the obligation to sell back the shares was invalid pursuant to s 36 of the Danish Contract Act (aftaleloven). The Supreme Court judgment was reasoned by the following facts:
In order to avoid the triggering of taxation through such share purchase, the shares were acquired at market value, and therefore the share purchase did not in itself contain a financial preference of the employees comparable to remuneration as set out in s 17a of the Danish Salaried Employees Act.
The share purchase programme entailed that the shares were acquired by the employees immediately (as opposed to a right to acquire the shares at a later point in time), and thus the agreement was not covered by the Danish Share Option Act.
However, in relation to setting aside the buy-back clause, the Supreme Court majority found that, with reference to the principles in and the motives of s 5 of the Danish Share Option Act, as a general rule invoking the buy-back clause was unfair in a case where the employment had been terminated by the Danish subsidiary without any breach on the part of the employee. This applied although the market value of the shares also at the time of termination corresponded to the purchase price paid by the employee for the shares.
It should be noted that the lawsuit could be brought against the Danish subsidiary irrespective of the fact that the offer to buy shares had been given by the parent company in Luxembourg, and that it was specifically stated in the terms of the programme that any dispute was governed by the laws of Luxembourg and was to be settled by the courts of Luxembourg. The Supreme Court found (as did the High Court) that the allocation of shares took place upon the recommendation of the management of the Danish subsidiary and that participation depended on the existence of an employment relationship.
The scope of the judgment
Although the judgment is reasoned by several specific circumstances, it raises a number of problems in relation to both existing and future incentive programmes comprising employee shares. In our opinion, the judgment will mainly affect the following terms and conditions in buy-back clauses for employee shares in incentive programmes and shareholders’ agreements:
• The reason for the resignation of the employee in question – in the event of unfair dismissal (Good Leaver) a buy-back clause will as a general rule be set aside.
• Unilateral right for the company – it may affect the validity if there is a reciprocal right to buy-back shares in the event of resignation.
• The buy-back price – must generally be the market price unless it involves breach of the employment on the part of the employee.
In any case, it will be subject to a specific assessment whether it is possible to remedy these uncertainties in existing programmes. As regards setting up future programmes, careful consideration should be given to the wording of potential buy-back clauses in order to avoid that such clauses are subsequently set aside as a consequence of the judgment.
For additional information and advice please contact Karin Absalonsen, Attorney-at-law, kab@nrlaw.dk.
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