Memo on Stock Options etc.; Legal Usage and Bill
Novo case:
The subject of the case was a stock option plan established in 1998 as part of a continuous annual grant of stock options to certain employees of Novo Nordisk A/S (Novo).
In May 1998, a salaried employee was informed that he had been awarded 400 options based on the condition that the company achieved two predefined financial goals for the year 1998. In the event that Novo only achieved one of the two financial goals, the employee would merely be entitled to half of the awarded options. In case of a termination of the employment relationship by the employee, the awarded options would only be exercisable for a period of three months as of the date of termination.
In February 1999, Novo informed the employee that one of the goals of 1998 had been achieved, for which reason 50% of the awarded options would be granted him on 25 March 1999. At the same time, the employee was informed that on the condition that he still qualified for participating in the stock option plan for the financial year 1999 (stock option plan of 2000) he would participate in a similar plan. It was a condition that he was still employed on 1 March 1999.
On 24 February 1999 the employee gave notice with effect as of 31 March 1999.
Judgement of the Danish Supreme Court of 11 March 2004:
It ensues from the judgement of the Danish Supreme Court of 11 March 2004 that stock options, including inter alia performance-based options, are not generally speaking remuneration in the sense of section 17a of the Danish Salaried Employees Act. It must be assessed in each case whether the stock options are to be considered as remuneration pursuant to this section of the Act.
In the present case, the Supreme Court explicitly established that the stock options were to be considered as remuneration pursuant to section 17a of the Salaried Employees Act. It seems that the Supreme Court has attached importance to contract law and remuneration aspects.
According to section 17a of the Salaried Employees Act, a compensation claim must be based on agreement or usual practise. Particularly, the Supreme Court emphasized the importance of the fact that the employee had been informed about the award of stock options for the stock option plan of 1999. Furthermore, he had been informed that he also could count on being awarded options in connection with the stock option plan of 2000 provided the financial goals for 1999 were achieved.
According to section 17a of the Salaried Employees Act, it is also a condition that the salaried employee is partly remunerated on commission basis, bonus payments or the like. When assessing the question as to whether the stock options are considered as remuneration, the Supreme Court established that the conclusive time for the assessment hereof is the awarding time. This is the time of acquisition. The development of the company and consequently of the stock price in the period of three years following the grant (maturity period) and the period of five years in which exercise may take place (exercise period) is not decisive for the assessment of whether the granted stock options represent a financial value. The determining point is whether at the time of award there is a possibility of gaining a profit through an increase of the stock price without any risk of loss through a decline in the stock price. Novo had calculated that in the event of achieving the financial goals pursuant to the plan, the stock options would represent a value corresponding to two months' salary on the time of award.
On this basis, the Supreme Court decided that any provisions of stock option agreements stipulating that the stock options in case of the employee's resignation shall expire three months after the date of resignation are void, cf. section 17a compared to section 21 of the Salaried Employees Act. Consequently, it was not possible to deprive the employee of the stock options for the year 1998, and the employee was entitled to a part of the granted stock options for the year 1999 corresponding to the number of months he had been employed. The same must to a further degree apply in the event that the employer dismisses the employee.
In this connection it should be noted that the Danish Maritime and Commercial Court also declared the provision in question to be void pursuant to section 36 of the Danish Contracts Act. Some have considered the reference to section 36 of the Contracts Act to reflect that the provision could be applied on an isolated basis. If this is the case, the provision may also be invoked by employees not covered by the Salaried Employees Act, for instance managing directors.
The Supreme Court chose other grounds in the judgement of the Novo case and did not make any reference to section 36 of the Contracts Act. This means that it is not clarified whether section 36 of the Act may be applied. In relation to managing directors the provision is most probably not applicable.
Alpharma case:
The subject of this case was the question as to whether warrants granted by a company to an employee are to be considered as remuneration in the sense of the Danish Holiday Act, and in the affirmative which value shall serve as basis for the calculation of the holiday allowance.
In March 1997 and 1998, warrants were granted to the employee. They vested over a period of four years and the possibilities of exercising the warrants expired five respectively seven years after the dates of granting. The subscription price of the shares was fixed at the market price on the date of granting.
On 10 March 1999, the parties agreed upon the termination of the employment as of 31 March 2000. It appears from the agreement that "Holidays earned in 1997 and 1998 are expected to be taken during the period of release from work, while the holiday allowance for holidays earned in 1999 and 2000 shall be paid to FerieKonto on the date of resignation. Days off granted for the years 1999 and 2000 are also expected to be taken."
In 1999 and 2000, the employee exercised granted and vested warrants.
Judgement of the Supreme Court of 10 March 2004:
The Supreme Court found that warrants and stock options granted to employees as part of their remuneration only shall be included in the calculation of holiday allowances on termination of the employment, cf. section 14 (3) (now section 23 (6)) of the Holiday Act, when the grant took place in the relevant year(s) of earning and in that case only with the value at the time of granting.
Consequently, it should be assessed in each case whether warrants and stock options are to be considered as remuneration entailing the right for holiday allowance.
In relation to the Holiday Act, the Supreme Court found that the time of granting must be considered as the time of acquisition, although the grant may be subject to continued employment on the vesting date. In the sense of the Holiday Act, a subsequent increase in value may not be considered as employee pay.
Already due to the fact that the employee was not granted the warrants in the relevant years of earning, 1999 and 2000, but in 1997 and 1998, for which years he had taken holidays when resigning, and due to the fact that the employee's claim for holiday allowance was calculated on basis of the value on the time of exercise, the employee's claim was not upheld.
Intel case:
The subject of this case was inter alia the question as to whether a claim for stock options issued by a foreign mother company, Intel Corporation, may be made against the Danish employer, Intel Denmark, and the validity of the reduction clause by which the period of exercise was reduced considerably for already vested stock options in connection with the employee's resignation.
The Maritime and Commercial Court found that the stock options supposedly formed part of the total remuneration of the employees, at least from the employees' point of view, and that the stock options consequently would play an important part in the determination of the total remuneration the employee received from Intel Denmark. Therefore, the Court found that it would be in contradiction to important considerations for the protection of the employees if the employees were to make their claim concerning stock options against the mother company, for which reason the Court decided that the employees' claim could be made against Intel Denmark.
Hereafter, the Maritime and Commercial Court found that the question remained as to whether it was a binding condition for the granting and exercising of the stock options that the employee still was employed on the vesting date. The Court found that it was not a question to decide whether the clause concerning cancellation and the reduction of period should be set aside pursuant to clause 17a of the Danish Salaried Employees Act, cf. section 21.
Concerning this question the Court decided that neither the Notice of Grant, the employment agreement nor the remuneration presentation showed in a "sufficiently clear and unequivocal way" that the stock options would expire or the period of exercise be reduced in case of an termination of the employment. Consequently, the Maritime and Commercial Court concluded that the specification of these provisions was made in a way that was "completely insufficient to constitute a condition of cancellation as a lawfully binding element of the granting agreement entered into by the parties". Therefore, the Court did not consider the clause concerning cancellation and reduction of period to be adopted by the parties.
The judgement of the Maritime and Commercial Court was appealed to the Supreme Court. The case will be tried mid November 2004.
Bills on stock options and warrants etc.:
On 28 January 2004, the Danish Minister of Employment has introduced Bills concerning stock options and warrants etc. in employment relationships and concerning an amendment of the Salaried Employees Act.
The purpose of the Bills is to improve the conditions for the range of the extension of stock options and warrants etc. offered to salaried employees as part of the employment relationship and to determine the rules and regulations for agreements or plans about stock options and warrants in the employment relationship.
The Bill on stock options and warrants etc. in employment relationships proposes that employees dismissed by the employer as a main rule maintain their right to exercise stock options and warrants granted as if the employees still were employed. Further, it is proposed that an employee in case of being dismissed by the employer maintains the right to be granted a proportional part of the stock options and warrants in the running financial year during which the employee resigns. If the employee gives notice, however, the employee loses according to the Bill as a main rule the right to exercise granted stock options and warrants as well as the right to a proportional part of the grants in the running financial year during which the employee resigns.
Furthermore, the Bill stipulates a duty for the employer to inform about the contents of the plan or the agreement on stock options and warrants etc. The Bill also contains a provision stipulating that plans or agreements on stock options and warrants etc. do not enter into the calculations of holiday allowances or benefits or other statuary payments of refunds or compensations calculated on basis of the salary.
The Bill contains minimum provisions that may not be deviated from to the disadvantage of the employees.
Following the first reading of the Bills in the Danish Parliament (Folketinget) on 19 February 2004, they were reported to the Labour Market Committee of the Folketing. The Committee's report will be introduced on 7 April 2004 after which the Bills are ready for the second reading.
The Ministry of Employment has informed us that the Bills are expected to enter into force on 1 July 2004. For plans or agreements established before the entry into force of the Bills, the new Act will be applicable for grants made after the entry into force.
Any queries concerning stock options and warrants in employment relationships may be addressed to attorney-at-law Tina Reissmann or attorney-at-law Tina Brøgger Sørensen.