The Danish Supreme Court rules on forfeiture of equity awards with reference to the amended Danish Stock Option Act
The 2019 amendments to the Danish Stock Option Act
Before 1 January 2019, the Danish Stock Option Act included specific mandatory "good leaver" and "bad leaver" provisions governing the rights to unvested equity awards upon termination of employment. Pursuant to the act, employees deemed "good leavers" were entitled to retain both vested and unvested equity awards according to the exercise terms as if they were still employed.
When the amendments to the Stock Option Act entered into force on 1 January 2019, these so-called "good leaver" and "bad leaver" provisions were abolished in favour of freedom of contract. As a result, it became possible, for instance, to agree that an employee considered a "good leaver" would forfeit the right to all unvested equity awards without the right to compensation. However, leaver terms must still be considered reasonable, see section 36 of the Danish Contracts Act.
According to the preparatory works to the amended Stock Option Act, the amended act applies to schemes introduced after 1 January 2019. Schemes established prior to 1 January 2019 remain covered by the pre-2019 rules until the schemes are materially changed.
Background of the case
In 2016, two employees, A and B, were hired by a Danish company. During their employment, they were granted equity awards under two different equity plans established by the company's U.S.-based parent company.
On 22 January 2019, they received equity award grants under the framework of the equity plan established in 2010. Later, in September 2020, they were granted additional equity awards under the parent company's 2019 equity plan.
The grant agreements governing these stock options and RSUs specified that any unvested equity awards would be forfeited upon termination of employment. In May 2021, A and B were both terminated by the company for operational reasons, and their employments formally ended in September 2021. Subsequently, A and B claimed that their equity grants were governed by the pre-2019 Danish Stock Option Act. As they were good leavers, they claimed to be entitled to retain all unvested equity awards.
The Danish Maritime and Commercial High Court's findings
Before reaching the Danish Supreme Court, the case was initially heard by the Danish Maritime and Commercial High Court. The court found that the grants made with reference to the 2010 equity plan were governed by the rules laid down in the pre-2019 Danish Stock Option Act. The court reached the same conclusion with respect to the grants made with reference to the 2019 equity plan, given that the changes from the 2010 plan to the 2019 plan were not considered material.
Consequently, the court ruled in favour of A and B, granting them the right to compensation for their unvested stock options and RSUs.
The Danish Supreme Court's findings
The employer appealed the case to the Danish Supreme Court, which overturned the lower court's judgment. The Supreme Court initially determined that the key factor in determining the applicable rules is the point in time where the employer makes a legally binding commitment regarding the employees' right to receive an equity award.
In the specific case, the Supreme Court concluded that the 2010 and 2019 plans outlined the general framework for granting equity awards, but they did not represent such binding commitment. Instead, A and B were deemed to have acquired rights to the contested stock options and RSUs through the individual grant agreements issued after 1 January 2019.
On that basis, the Supreme Court found that the equity awards were governed by the amended Danish Stock Option Act and rejected the employees' claims for compensation for the lapse of the right to unvested equity awards.
As the employees had not received a mandatory employer's statement (in Danish: "arbejdsgivererklæring"), they were each awarded compensation of DKK 2,500.
Implications for employers
The judgment establishes an important precedent regarding the application of the 2019 amendments to the Danish Stock Option Act. The Danish Supreme Court ruled that the time of a legally binding commitment determines whether the former or the amended rules apply. In this specific case, the date of the individual grant agreements was decisive, not the date of establishment of the applicable equity plans, when determining the time of the legally binding commitment.
When granting equity awards, employers must carefully consider the relevant date of the legally binding commitment to employees if employers want to ensure that the good and bad leaver terms are subject to freedom of contract pursuant to the amended rules in the Danish Stock Option Act.