More freedom of contract in respect of share-based incentive schemes


The Danish Minister for Employment has presented a proposal to amend the Danish Stock Option Act. The purpose is to create more freedom of contract, but the proposal also contains various unclear issues.
The Minister's proposal includes an abolition of the provisions in the Stock Option Act restricting 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 imply that an employee resigning from his/her employment will forfeit all options/warrants. An employee dismissed by the employer, on the contrary, will retain all options/warrants and will be entitled to a proportionate share of the awards to which he/she would have been entitled by agreement or custom.  

Increased flexibility for the employer

Abolition of the good leaver/bad leaver provisions will create a much higher degree of freedom of contract and increased flexibility in the drafting of stock option schemes. By way of example, it will be possible to validly agree that unexercised options will lapse on termination of the employment, irrespective of by whom and for which reason the employment is terminated. 

Also, it will be possible to agree that after termination of the employment the period for exercise of options vested but not yet exercised will be shorter. 

If the scheme covers participants in more than one country, it will of course still be necessary to bear in mind that there may be different leaver regulations in the other countries.

The amendment will imply, though, that Danish subsidiaries of foreign companies will to a much higher extent be able to use the foreign schemes without separate "Danish" adjustments to the terms. However, it will still be necessary to prepare an employer statement in Danish.

The freedom of contract will make it even more necessary than hitherto to decide, when drafting a stock option incentive scheme, what will happen on termination of an employment. 

Shares acquired under a stock option scheme

The proposed bill also regulates what can be agreed in respect of shares acquired under a stock option scheme. 

The Minister proposes to prevent the employer and the employee from agreeing that 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. This implies that it is not possible in a stock option scheme to agree a fixed buy-back price on termination of the employment.

The buy-back regulation is somewhat unclear.  

According to the explanatory notes to the bill, it is a pre-condition for buy-back of shares at market price that there is a basis for determining the market price. 
The basis may (according to the notes) be determined in connection with an agreement on buy-back of the shares at market price on termination of employment. 

However, if the relevant shares cannot at all be sold in the open market, a clause on buy-back at market price will not be enforceable according to the notes. In such cases, buy-back on termination of employment may be effected in compliance with the ordinary principles of contract law laid down in the Danish Contracts Act and developed by case law. 

The market price in unlisted companies will typically be subject to significant uncertainty. Also, it is unclear in the bill what is meant by shares that "cannot at all be sold in the open market".  

Furthermore, it seems inappropriate that there will be different regulations for shares acquired by an employee under a stock option scheme and for shares acquired outside the scope of the Danish Stock Option Act, e.g. the employee's direct investment in the shares.


The bill is expected to enter into force on 1 January 2019. 

Existing stock option schemes are not affected by the bill. 

Given the proposed increase in freedom of contract and in flexibility, employers should already now start considering the future design of their schemes. At the same time, it may be relevant to consider whether to amend existing schemes and, if so, to what extent.