Global Incentives Insight Series: Denmark – Has Danish incentives law shifted gear following Tesla’s recent visit to the Supreme Court?

To understand, we need to shift into reverse and consider the history behind the decision.

Back to the past - the Danish legal framework prior to January 2019

In 2004, the Danish courts delivered a groundbreaking judgment against Novo Nordisk: the granting of stock options (including RSUs) was to be classified as remuneration and so allow employees the right to retain their options/RSUs in the event of termination of their employment, irrespective of their reasons for leaving. So, even employees who resigned or who had been dismissed for gross misconduct could retain their options/RSUs in full!

The Stock Option Act of 2004 (the “2004 Act”) was swiftly implemented to reaffirm this judgement but to also nuance it by limiting its effect to good leavers only.

Looking at this is a little more detail, the 2004 Act regulates arrangements that give an employee the right to acquire shares at a later date as part of their employment relationship. Section 5 of the 2004 Act stipulated that an employee’s options/RSUs would not lapse if the employment relationship ended due to termination by the employer (unless such termination was due to the employee’s breach of the employment relationship or if the employee had been dismissed with cause).

Section 5 of the 2004 Act was therefore highly protective in nature in order to ensure that employees retained their equity rights upon termination unless specific conditions were met that justified the forfeiture of their options/RSUs. That is, any provision purporting to accelerate vesting or curtail the exercise window of such options/RSUs would be invalid and instead the options/RSUs would continue following any such cessation of employment in accordance with their usual vesting schedule and exercisable on the occurrence of any other exercise triggers, such as a corporate event or certain periods of time passing.

The Danish legal framework since January 2019

Section 5 of the 2004 Act was repealed by Act no. 1524 on 1 January 2019. This move was part of a broader effort to enhance contractual freedom in the design of share-based remuneration plans so, from 2019, an employee could agree to their option/RSU lapsing if the employment relationship was ended by the employer irrespective of the reason (so seemingly almost the opposite of the position before the 2004 Act came into force).

These amendments apply to employee stock plans established after 1 January 2019 when the amended Act came into force. However, the 2019 amendments did not prevent the establishment of arrangements under the same conditions as the previous law and so a veil of uncertainty remained.

Tesla’s visit to the Danish Maritime and Commercial Court

The Tesla employee stock option plan is a global incentive scheme for Tesla employees and permits the grant of both RSUs and stock options. Employees granted RSUs had the right, subject to certain conditions, to receive a certain number of Tesla shares free of charge on the vesting of their RSU. Employees granted stock options had the right to buy a certain number of Tesla shares at a predetermined price once the option had vested and become exercisable.

Tesla had two sets of rules that made up their employee stock option plan: an old version of the rules from 2010 (and due to automatically expire in 2020) and a new version of the rules from 2019 (with an expiry date of 2029).

The primary condition under the Tesla employee stock option plan was that employees must be employed at the time their options/RSUs vest in accordance with the vesting schedule set out in the relevant option/RSU agreement in order for vesting to take place. Tesla argued that the former employees were therefore not entitled to acquire the shares under the unvested portion of their options/RSUs since they did not “have the right to acquire” such unvested shares at the time of resignation. In making this argument, Tesla were saying that the 2019 amendments to the 2004 Act applied to options/RSUs granted to the three former employees pursuant to the 2019 version of the plan rules. However, despite being a “new” set of plan rules, the Danish Maritime and Commercial Court found that the 2019 rules made too few significant material changes to Tesla’s employee stock option plan to constitute the establishment of a new arrangement.

The Danish Maritime and Commercial Court stated that the grants made under the 2019 version of the plan rules and after 2019 were actually made on the basis of the 2010 version of the plan rules. As such, those grants were covered by the protection in section 5(1) of the Stock Option Act of 2004 (that is, as “good leavers” the former employees retained the right to acquire all the shares underlying their RSUs/stock options as if they were still employed.

Which way did the Supreme Court go?

The Supreme Court reversed the decision of the Danish Maritime and Commercial Court.

They found that when establishing whether the 2019 amendments to the 2004 Act governed the Tesla employee stock option plan, the decisive element is when the employee obtained a legally binding commitment from the employer to the specific grants. If the grant was pre-1 January 2019, then the rules would be governed by the law pre-dating the amendment, namely section 5(1) of the Stock Option Act of 2004. If the grant was on 1 January 2019 or after, then the rules would be governed by the 2019 amendments to the 2004 Act. The court ruled that the fact the grant agreements from 2019 refer to the 2010 version of the plan rules does not mean that they are established before the 2019 amendments to the 2004 Act. The decisive factor in this case was that the former employees only obtained the right to the disputed RSUs and stock options through grant agreements dated 22 January 2019 and 21 September 2020. As a result of the grant date, the RSUs and stock option agreements were covered by the expansion of freedom of contract introduced by the legislative amendment that came into force on 1 January 2019, namely the 2019 amendments to the 2004 Act. The condition that any outstanding RSUs and stock options lapse on termination of employment was therefore found to be valid.

Final comments

For options/RSUs granted on or after 1 January 2019, this landmark decision by the Supreme Court brings Danish incentives law into line with the position in many other jurisdictions where equity incentives stock options are commonly operated, such as the UK and the US. For now, the old position remains for options/RSUs granted prior to the 2019 amendments to the 2004 Act but, given the usual ten-year lifespan of options/RSUs, the surprises for Danish employers should become fewer over time. In the meantime, Bird & Bird’s international Employee Incentives & Benefits (EIB) team are here to help and advise if you have any queries on your pre-2019 Danish incentives or how to structure your post-2019 grants to align with your broader global objectives.

Your trusted adviser

If you are considering granting options to your Danish employees, or have questions about your existing option plan and how this decision might impact your plan, please contact Søren Pedersen or Sarah Ferguson at [email protected] and [email protected] respectively. We would be happy to offer our expert assistance.

Join us next time as we discover more in our Incentives World Tour!