Recently the Danish Ministry of Employment introduced and sent a bill out for consultation changing the rules of the Danish Stock Options Act, now including greater freedom of contract in relation to the terms of a stock option program for employees. The proposed amendment of the act will repeal the limitations on freedom of contract relating to the employee share schemes.
The Danish Stock Options Act governs the employees’ right to exercise share options following the termination of their employment and is mandatory in the sense that it cannot deviate to the detriment of the employee.
The bill was submitted as a result of a political agreement on both business and entrepreneurial initiatives between the Danish government, the Danish People’s Party and the Danish Social Liberal Party from 12 November 2017. The political agreement entails that “freedom of contract is to be established in order to enter into vesting agreements in employee share programmes, including making it possible to agree that employee shares not yet accrued at the time of termination of employment will lapse when the employee’s employment is terminated” and that “freedom of contract is to be established in order to enter into agreements on share repurchases at market price upon termination of employment”.
Among other things, the bill stipulates that the two main sections of the Act that ought to be removed and replaced are Section 4 and Section 5. The proposed amendment asks that both sections are replaced with a completely new Section 4.
Present Danish Stock Options Act Section 4 and Section 5
Currently, these two sections distinguish between whether an employee parting ways with a company is a “good leaver” or a “bad leaver”. If an employee terminated their employment or was dismissed due to a breach in contract, then the employee is considered a “bad leaver”. However, if the employee resigns due to issues like pensioning, then that employee is a “good leaver”.
When it comes to the employee’s right to hold and keep stock options with regards to a termination, distinguishing between a good and bad leaver is crucial and central to its application. As a good leaver, they are entitled to keep their stock granted options which they have not exercised. On top of that, as per Section 4, they also get a proportional part of future grants. On the other hand, a bad leaver entirely loses their right to tap into already granted stock options which have not yet been exercised, unless otherwise stipulated in their agreement.
Section 4 and Section 5 are regarded as the outlining main principles of the Stock Option Act, therefore, in their presence in the new Bill would only hinder the changes they are trying to implement. Therefore, the agreed upon solution is to simply get rid of it in its entirety.
Draft Bill- Proposed Amendment of Danish Stock Options Act
The proposed draft bill proposes that the new Section 4 should read:
“The employee and the employer can agree that the employer- in relation to the employee’s resignation- can repurchase shares which have been purchased in accordance with an arrangement or agreement covered by Section 1 at market price”
With the implementation of the proposed amendments, the act will now cover and further look into new avenues like:
- Limitation Lapses
Under the draft bill that has been sent out for consultation, employees and employers can freely agree on what the terms for their stock options should be in relation to the employee’s termination.
Therefore, the employer can establish that granted but not exercised stock options will lapse regardless of the reason for the termination. This means that the employer may establish a condition that unexercised share options will and can lapse not withstanding the reason for the employee’s termination.
Areas yet to be clarified:
It has yet to be clarified whether according to the draft Bill, it is possible to decide that such a lapse will occur already on the date of notice or the date on which the employee is released from the duty to work, instead of the effective date of termination.
- Buying back at market price
The draft bill goes on to propose the possibility of establishing a condition that allows for employers to re-purchase shares acquired by the employee under a share-based remuneration scheme.
As it has been proposed, it will be a requirement that any buy back should take place within the current market value.
Areas yet to be clarified:
Some of the remarks found in the explanatory notes of the Bill are rather cryptic. As a result, it is unclear exactly how the proposed provision is to be interpreted in relation to shares that are subject to restrictions on transferability as well as shares whose market value cannot be fixed with certainty, such as unquoted shares.
Overall, the bill demands a significant change to the current rules and laws that govern employees’ stock options. The changes will now put employees in a more favorable position in comparison to the current conditions. Currently, they are deprived of their right to share options regardless of their termination situation. With the new Bill, there will come significant strengthening of their freedom of contract in relation to their rights on termination. As opposed to now where employees continue to run the risk of losing the right to their stock options, regardless of their grounds for termination.
Furthermore, not only does this benefit the employee, it also benefits the employer. The possibility to agree to repurchases will put employers in a better position. This bright future is forseeable despite the uncertainties in relation to the repurchasing guidelines.
However, it is expected that the Bill will be faced with opposition from union representatives and employee organizations.
According to the draft bill, the proposed amendments are intended to only apply to new employee share schemes. This means that existing schemes will continue to comply with the current Act’s rules.
The deadline for the case hearing is 27 August 2018. It is expected that the final improved and amended Bill will be submitted in Denmark by autumn this year. This is so the Bill can enter into full implementation by January 1 2019.
