The Supreme Court found that two employees’ right to unvested stock options and RSUs granted after 1 January 2019 under a plan implemented before 1 January 2019 followed the new rules of the Stock Option Act, and for this reason a condition of lapse on termination of employment was valid.

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Under the provisions of the Stock Option Act in effect until 31 December 2018 (i.e., the 2004 Act), it was not possible to validly agree that granted unvested subscription or purchase rights covered by the Stock Option Act would lapse upon the employer’s termination of the employment relationship for reasons other than an employee’s breach of contract. From 1 January 2019, freedom of contract was introduced and it became possible to agree that unvested rights lapse on termination of employment. According to the preparatory works to the amending act, the new legislation applies to plans implemented after 1 January 2019, and plans already implemented remain covered by the 2004 Act until they are amended.

In this case, the Supreme Court had to decide whether two employees’ stock options and Restricted Stock Units (RSUs) were regulated by the 2004 Act or the new legislation. The employees were granted stock options and RSUs in 2019 and 2020. The grants were made under agreements that referred to an incentive programme from 2010 for the year 2019, and an incentive programme from 2019 (an updated version of the 2010 programme) for the year 2020. Both incentive programmes and the grant agreements specified that unvested stock options and RSUs granted would lapse on termination of employment.

On dismissal of the employees for operational reasons, the employer stated that the employees’ unvested stock options and RSUs would lapse. The employees were not satisfied with this, as they believed the clause on lapse was invalid because the rights were regulated by the 2004 Act. The employees therefore took legal action against the employer.

As the court of first instance, the Maritime and Commercial Court held that the stock options and RSUs were governed by the 2004 Act and, therefore, did not lapse on termination of employment. With regard to the rights granted in 2019, the Court noted that the 2004 Act applied because these rights were granted under the incentive programme from 2010. As for the rights granted in 2020, the Court found that the update of the incentive programme in 2019 did not include “… such significant material changes to the [employer’s] stock option plan that it has the nature of establishing a new plan or a change to an existing plan within the meaning of the Stock Option Act…” and that stock options and RSUs granted under the 2019 plan were therefore also governed by the 2004 Act.

The time of a contractually binding promise to grant is decisive
In contrast, the Supreme Court ruled that the employees’ unvested stock options and RSUs granted in 2019 and 2020 were subject to the new legislation from 2019, so the condition of lapse on termination of employment was valid.

The Supreme Court noted that in order to be covered by the Stock Option Act, an incentive plan must contain a contractually binding promise to allow employees to purchase or subscribe for stock or shares at a later date. Neither the 2010 nor the 2019 incentive programme contained such a promise to the employees. The programmes established the framework for a possible grant of stock options and RSUs, but did not contain a binding promise to grant. It was only in the grant agreements that there was a contractually binding promise to the employees, and it was therefore the grant agreements that constituted plans covered by the Stock Option Act. Since the grant agreements were concluded after 1 January 2019, they were governed by the rules from 2019.

The Supreme Court then emphasised that it did not matter whether reference was made to the 2010 incentive programme in the 2019 award agreements, or whether the 2019 programme had been materially changed after the 2019 rules came into force, when the contractually binding promise was provided in the grant agreements.

The employees were, however, awarded a compensation of DKK 2,500 because the employer had not complied with the requirement in the Stock Option Act to provide a written statement. 

Norrbom Vinding notes:

The Supreme Court’s ruling shows that the decisive factor as to whether granted unvested subscription or purchase rights covered by the Stock Option Act are governed by the 2004 Act or the legislation from 2019 is whether the employer has made a contractually binding promise to grant the rights to the employees before or after 1 January 2019. The time of the contractually binding promise is then also decisive in determining whether or not a condition of lapse in connection with the end of an employment relationship following termination by the employer for reasons other than an employee’s breach of contract can be valid.

The ruling highlights the need for employers who want the new legislation from 2019 to apply to an incentive plan implemented before 2019 to consider whether – and, if so, to what extent – it is necessary to change the incentive plan. 

The content of the above is not, and should not be a substitute for legal advice.