Supreme Court Ruling Affects the Unterstanding of Equity Incentive Plans in Denmark

In February 2025, the Danish Supreme Court issued a landmark ruling on how unvested options awarded as part of an equity incentive plan for employees shall be handled upon termination following significant legislative changes in 2019. The Supreme Court followed the arguments presented by ECOVIS Legal Denmark on behalf of a multinational company enabling companies to potentially avoid payments of unvested options (may cover various different kind of shares) to employees, who leave the company.

Introduction to the Case and Legal Framework

During their employment, two employees had been offered participation in an equity incentive plan under which they would either be awarded Restricted Stock Units or offered to purchase a share once the option had vested. Vesting was subject to the employees still being employed on specific vesting dates stated in the offer of participation, and any unvested options
would lapse upon termination.

The two employees were offered participation both before and after 1 January 2019. This is significant as a revised version of the Danish Stock Option Act (SOA) came into effect on that date. However, the transition rules from the SOA applicable prior to January 1, 2019 (2004 SOA) and the revised version (2019 SOA) were unclear, resulting in a lack of clarity as to which set of rules applied to their equity incentive plans.

The significance of whether the 2004 SOA or the 2019 SOA apply is the fact that the 2004 SOA granted employees a statutory protected right to receive unvested options after termination if they were good leavers. After the implementation of the 2019 SOA such legal protection no longer applied.

When the two employees ended their employment, they claimed that the 2004 SOA applied, entitling them to receive the unvested portion of their options, as they were good leavers. The company argued that the 2019 SOA applied, and the core of the dispute was consequently a legal interpretation of the transition rules from the 2004 SOA to the 2019 SOA.

Supreme Court Ruling

In the ruling, the Danish Supreme Court established that the decisive factor for whether the 2004 or the 2019 SOA applies, is at what point in time the actual and legally binding promise of participation in the option-based incentive plan has been made to the employee. If the promise was given before 1 January 2019, the 2004 SOA applies. If the promise was given after
1 January 2019, the 2019 SOA applies.

The Supreme Court further explained that the equity incentive plan did not constitute such an actual and legally binding promise in itself as it was merely the overall framework for grants and did not set out any promise of participation. Whether the 2004 SOA or the 2019 SOA applied therefore depended on when they received their individual offer of participation.

As the unvested options upon termination were all relating to offers granted after 1 January 2019, the 2019 SOA applied. Consequently, no statutory protected right to receive unvested options after termination applied, and the handling of the unvested options would therefore depend on what was agreed upon between the parties.

In this scenario, it meant that the employees did not have any entitlement to the unvested part of their options, as the 2019 SOA prescribes freedom of contract, and the company’s equity incentive plan and individual offers of participation prescribed that unvested options would lapse upon termination.

Key Legal Considerations

The Supreme Court ruling has now clarified what applies when an employee leave his or her position before all awarded options have vested, and it will consequently be easier for employers to handle unvested options upon termination correctly in the future.

Based on the ruling, companies can now limit economic exposure by limiting non-intended payments of unvested options to employees, who left the company, while still complying with the 2019 SOA. It is, however, important for companies to ensure that the transition to the 2019 SOA is handled correctly. Therefore, it is recommended for employers to consider whether
any amendments of their incentive schemes are desirable.

Navigating the complexities of equity incentive plans and the legislative changes can be challenging for both employers and employees. ECOVIS Legal Denmark’s Employment and Labour department is ready to assist, offering expert advice and pragmatic solutions in matters related to handling of equity incentive schemes in employment relationships.