New rules on share options provide greater freedom of contract
As from 1 January 2019, greater freedom of contract will apply to share option programmes. This is the most essential change introduced by the new Danish Share Option Act, which has just been adopted by the Danish Parliament. The new rules give rise to a number of considerations for companies in connection with the establishment of share-based incentive programmes.
On 6 December 2018, the Danish Parliament adopted an amendment to the Danish Share Option Act. The adopted bill is identical with the bill that was up for consultation this summer (and submitted to the Parliament on 3 October 2018). The new rules will enter into force on 1 January 2019.
The amendment to the Danish Share Option Act entails that Sections 4 and 5 of the current Share Option Act are deleted and a new Section 4 is implemented which shall regulate the repurchase of shares acquired through share programmes comprised by the Share Option Act.
Freedom of Contract in connection with Termination of Employment
The amendment entails - as also stated directly in the bill - that freedom of contract is introduced in order to enter into agreements regarding how to deal with non-exercised instruments comprised by the Share Option Act in connection with termination of employment. This means that so-called "good leavers" will no longer have a specific legal right to keep granted, but not exercised instruments in connection with termination of the employment. However, Section 36 of the Danish Contracts Act will continue to be applicable to the effect that terms and conditions that are deemed as unfair can be set aside or changed by the courts.
Thus, it will be up to the courts to establish the framework with regard to when it will be unfair that a good leaver loses the right to non-exercised share instruments. However, it must be expected that it will now be possible to introduce a vesting period to the effect that a good leaver loses the right to "non-vested" share instruments, as it is directly stated in the explanatory notes regarding the amendment to the Act that "freedom of contract shall govern so-called vesting agreements".
Repurchase of Shares
With respect to repurchase of shares, the Act now introduces a new Section 4, pursuant to which it can be agreed that the employer, upon the employee's termination of employment, can repurchase shares - acquired under a programme or an agreement comprised by the Share Option Act - at market price. On the one hand, such amendment will entail that the uncertainty that previously existed in regard to the possibility of enforcing a repurchase of shares from a good leaver is now clarified, but on the other hand, the fact that repurchase in all circumstances shall be at market price seems inappropriate - for instance in a situation of material breach.
Especially in relation to the repurchase of shares, the amendment to the Act gives rise to a number of questions, including the determination of the market price. Furthermore, according to the explanatory notes to the Act, repurchase clauses cannot be enforced in relation to shares "which pursuant to the programme are non-negotiable on the open market". However, it is not clear what exactly is meant by "negotiable on the open market", including whether repurchase may only be agreed for listed shares.
Warrants or Share Purchase Programmes?
The new rules on share options give rise to a number of considerations in connection with the establishment of share-based incentive programmes. This applies, inter alia, in relation to the choice between:
- Share Option/Warrant Programmes (comprised by the Share Option Act)
- Share Purchase Programmes (not comprised by the Share Option Act)
Companies with share-based incentive programmes as part of the remuneration package for key employees should consider whether they still have the most appropriate solutions in this respect. Plesner gives advice on a current basis regarding the establishment of and amendments to incentive programmes, including the tax-related consequences in this respect.