More freedom of contract in respect of stock option schemes

The amendments to the Stock Option Act have abolished the restrictions on what can be agreed in respect of options/warrants in connection with termination of an employment.

Today, the good leaver/bad leaver provisions in the Stock Option Act allow an employer and an employee to agree that if the employment is terminated by the employee, the employee will forfeit all options/warrants, whereas if the employment is terminated by the employer, the employee will always be entitled to retain all options/warrants and to be granted a proportionate share of future awards, if relevant.

The improved freedom of contract has accordingly been achieved, but it is definitely somewhat uncertain whether the amendments have clarified the rules, particularly with regard to shares acquired under a stock option scheme. 

More freedom of contract and more flexibility

The amendments have resulted in a much higher degree of freedom of contract and much more flexibility in the drafting of stock option schemes. 

By way of example, it will be possible to validly agree that unvested options will lapse on termination of the employment, irrespective of by whom and for which reason the employment is terminated. Also, it will by way of example be possible to agree that after termination of the employment the period for exercise of vested options will be shorter.

In international groups of companies with employees in different countries, it is still necessary to keep in mind that there may be different leaver regulations in the various countries. The amendments will imply, though, that Danish companies in foreign groups to a much higher extent will be able to use the foreign schemes without separate "Danish" adjustments. 

However, it will still be necessary to prepare employer statements in Danish. Also, the amendments will make it even more necessary than hitherto to decide, when drafting a stock option scheme, what must happen on termination of an employment. 

Shares acquired under a stock option scheme

The amendments have introduced a regulation preventing the employer and the employee from agreeing that, on termination of the employment, the employer can buy back shares at a price below the market price if the shares have been acquired under a scheme covered by the Act. 

In our opinion, the buy-back regulation is somewhat unclear. See also our previous mention of the proposed Bill: More freedom of contract in respect of share-based incentive schemes.

Furthermore, it seems inappropriate that there is a separate regulation for buy back of shares acquired by an employee under a stock option scheme, while there is no separate regulation for buy back of shares acquired outside the scope of the Danish Stock Option Act, for example through the employee's direct investment in the shares.

Timing 

The amendments will enter into force on 1 January 2019. 

Existing stock option schemes will not be affected by the proposal, and the amendments will presumably lead to various challenges with regard to grants awarded after 1 January 2019 under existing stock option schemes – particularly if you wish to change the leaver regulation. 

The future wording of stock option schemes should be considered carefully, including whether to amend existing schemes.