Share option plans
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What is the scope of the Danish Stock Options Act, which regulates this area?
The Act is mandatory in the sense that it cannot be deviated from to the detriment of the employee. The Act only comprises employees. Managing directors, general managers and board members, (apart from employee elected board members), are not considered “employees” for the purposes of the Act.
An immediate right to purchase shares does not fall within the Act. In cases where the Act does not apply, the employee may have additional rights to maintain entitlements to share options in case of the employee’s own resignation or the termination of the employment by the company.
What tax issues are relevant when implementing share option plans?
Taxation as a general rule takes place when the options are exercised or disposed of. The employee will be liable to pay income tax calculated on the basis of the difference between the exercise price and the market value price. The highest tax rate is 63% of the difference. Correspondingly, the employer is entitled to obtain tax deductions for the costs under the plan. From 2010 and forward, the highest tax rate will be reduced to 56%.
Additional taxation of the employee takes place at the time of the sale of the shares. Any gain on the sale will be taxed as share income leading to taxation of between 28% and 43% of the gain. If losses are suffered in connection with the sale, such losses may, under certain circumstances, be deducted from the profit of sale of other shares.
Subject to certain conditions being fulfilled, a number of more favourable tax regimes apply.
Under one of these regimes, taxes can be deferred until the employee’s sale of the shares, where the profit of the sale of the shares will be taxed as share income leading to taxation of between 28% and 43%. These tax rates will be reduced to 27% and 42% in the period from 2010 to 2012 and forward. One condition is that the exercise price is at least 85% of the fair market value of the shares. Under these rules, the employer cannot obtain tax deductions for the costs under the programme.
What documents and information need the employer provide to the employee?
The Danish Stock Options Act obligates the employer to provide the employee with the following information about the conditions of an offered share option plan in a separate declaration:
| a) |
the time of grant, |
| b) |
the criteria or conditions for the grants, |
| c) |
the exercise time or period, |
| d) |
the price or the method of fixing the price the employee must pay for the shares, |
| e) |
the rights of the employee upon termination and |
| f) |
the financial aspects of participating in the share option program. |
This information must be given in writing and in Danish, and at the time of the incorporation of the share option plan in the employment contract at the latest. It is not sufficient to incorporate the information in the employment contract.
The Danish Act on Employment Particulars must also be complied with, meaning that certain information must be implemented in the employment contract.
Non-compliance with the duty to inform may entitle employees in question to compensation.
What happens in case of cessation of the employment?
| Cause for cessation |
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Consequences |
The employee terminates the employment |
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The employee loses the right to:
| - |
exercise options that have been issued but not exercised at the time of cessation of the employment, and |
| - |
the grant of options that have not been issued at the time of the cessation of the employment. | |
The employee rightfully terminates the employment due to breach on the part of the employer |
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The employee maintains the right to:
| - |
exercise the share option instrument in accordance with the terms of the scheme or the agreement as if the employee was still employed, and |
| - |
receive a proportionate share of the allotments that the employee would have been entitled to if the employee was still employed at the time of the allotment or at the end of the accounting year. | |
The employer terminates the employment due to lack of work |
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The employee maintains the right to:
| - |
exercise the share option instrument in accordance with the terms of the scheme or the agreement as if the employee was still employed, and |
| - |
receive a proportionate share of the allotments that the employee would have been entitled to if the employee was still employed at the time of the allotment or at the end of the accounting year. | |
The employer terminates the employment due to breach on the part of the employee |
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The employee loses the right to:
| - |
exercise options that have been issued but not exercised at the time of cessation of the employment, and |
| - |
the grant of options that have not been issued at the time of the cessation of the employment. | |
The employee is rightfully dismissed due to material breach |
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The employee loses the right to:
| - |
exercise options that have been issued but not exercised at the time of cessation of the employment, and |
| - |
the grant of options that have not been issued at the time of the cessation of the employment | |
The employee resigns because the employee has reached the age of retirement |
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The employee maintains the right to:
| - |
exercise the share option instrument in accordance with the terms of the scheme or the agreement as if the employee was still employed, and |
| - |
receive a proportionate share of the allotments that the employee would have been entitled to if the employee was still employed at the time of the allotment or at the end of the accounting year. | |
The employer terminates the employment due to the employee’s illness |
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The employee maintains the right to:
| - |
exercise the share option instrument in accordance with the terms of the scheme or the agreement as if the employee was still employed, and |
| - |
receive a proportionate share of the allotments that the employee would have been entitled to if the employee was still employed at the time of the allotment or at the end of the accounting year. | |
| The employee dies |
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The situation where the employee dies is not directly governed by the Act. Nonetheless, the case where an employee dies is treated as a termination of the employment by the employee with the result that the right to share option ceases at time of death, unless otherwise agreed.
The probate estate is not entitled to any part of share options allotted after the time of death. |
The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.