The decision concerns enterprises' interest in adopting terms providing for a speedy redemption of employees' stock options in case the ownership of the enterprise changes.
The case was brought by three employees who had been granted stock options in the period from 1999 to 2000 in the company where they were employed in accordance with the Danish Salaried Employees Act. The stock option grant was subject to various terms such as the employer’s right to reduce the exercise period for vested stock options in case of changes in ownership.
In 2004 the granted stock options were transferred to another company as a result of the change in ownership of the defendant company's US parent. In that connection, the exercise period for the employees' vested stock options was reduced from the ten years agreed at the grant date to one year.
The plaintiffs submitted that their employer had no authority to reduce the exercise period unilaterally, and that the terms providing the right to change the exercise period were invalid.
As against this claim, the defendant argued that there was a binding agreement between the parties concerning the terms mentioned, and therefore, the reduction of the exercise period for the stock options was legitimate.
The Danish Maritime and Commercial Court held that the terms relied upon by the company did not provide the authority to reduce the exercise period for the stock options as the company had not been transferred to an affiliate as required by the wording of the clause. In this connection, the Court attached weight to the fact that the plaintiffs had continuously been employed by the company on otherwise unaltered terms of employment, notwithstanding the changes that were implemented in 2004 as a result of the change in ownership.
The Maritime and Commercial Court further held that regardless of the wording of the contract terms, the company was barred from changing the exercise period unilaterally and solely in the interests of the company.
The Supreme Court affirmed the decision of the Maritime and Commercial Court but noted that there was no reason to decide on the general validity of the terms. Thus, the Supreme Court merely held that the reduction of the exercise period for the stock options was illegitimate in the case put before the Court as the terms were onerous on the stock option holders and that there were no grounds for interpreting the terms extensively so as to include the situation at issue.
iuno's Opinion
The decision of the Supreme Court establishes that in the case at issue the company had no authority to reduce the exercise period for the stock options. However, the Supreme Court did not decide on the question of whether the terms providing for such a reduction as a result of changes in the corporate structure must generally be considered invalid. Consequently, this question remains unclarified.
Nevertheless, the decision shows that as an employer you must be careful how you phrase this type of contract terms as they may be interpreted restrictively because of their onerous nature.
[Supreme Court judgment of January 7th, 2011, in case no. 503/2007]