Stock options

Various types of stock option plans can be used by employers as a means to recruit or retain or motivate the employees. The regulation in Denmark provides protection to the employee in the form of a duty for the employer to give proper information about the employer’s Stock Option Plan (1), but the legislation also contains regulations as to the employee’s entitlement to grants and exercise of the options (2). Furthermore, tax issues should be considered upon issuing stock option plans (3).

1. The employer’s duty to inform

According to The Danish Stock Options Act, the employer must inform the employee about the conditions of an offered stock option plan. The information to be given is:

• the time of grant
• the criteria or conditions for the grants
• the exercise time or period
• the price or the method of fixing the price the employee must pay for the stocks
• the rights of the employee upon termination, and
• the financial aspects of participating in the stock option program.

The above information must be given in a written statement in Danish. In case of non-compliance with the duty to inform, the employer can be sanctioned with compensation payable to the employees in question.

2. The employee’s entitlement to options in case of cessation of the employment

The right to keep stock options in case of termination of the employment is dependant on whether it is the employee or the employer, who is terminating the contract and on the cause for the termination.

If the employee resigns, and the resignation is not caused by a breach from the employer or if the employer terminates the contract because of the employee’s material breach of the employment contract, the employee will no longer be granted new options and will also lose his or her right to exercise already given options after the notice period.

If the employee resigns because of a material breach from the employer, or if he or she is dismissed for any other reason than his or her own material breach of his contract, the employee will retain the right to exercise all already given options according to the applicable programme. Furthermore, the employee will be entitled to a proportionate part of the options to be granted by the company in the accounting year in question.

The Act is mandatory and cannot be deviated from to the detriment of the employee. The Act comprises employees only. Managing directors, general managers and board members (apart from employee elected board members) are not defined as "employees". Thus, individual agreements can be entered into with respect to any such person.

The Act only applies to plans according to which employees are granted an option to purchase stocks in the future. Thus, an immediate right to purchase stocks does not fall within the Act. If the Act does not apply, the employee will, under some circumstances, have extended rights to maintain his entitlements in case of the employee’s own resignation/termination from employer.

3. Tax

As a main rule, the Danish Tax Assessment Act Section 28, following which the taxation will take place when the options are exercised or disposed of, will apply. The employee will be liable for income tax calculated on the basis of the difference between the exercise price and the market value price. Income tax can be up to 63 % of the described difference. On the other hand, the employer can obtain tax deductions for the costs under the plan. Furthermore, additional taxation of the employee takes place at the time of the sale of the stocks. Any gain on the sale will be taxed as share income leading to taxation of 28 %– 43 % (2007 figures) of the gain. If losses are suffered in connection with the sale, such losses may, under some circumstances, be deducted from the profit from the sale of other share which the employee might have made.

However, a more favourable tax regime will be applicable if some specified conditions are fulfilled. According to the Danish Tax Assessment Act Section 7H, taxes can be deferred until the employee’s sale of the stocks. At this point in time, the profit of the sale of the shares will be taxed as share income; please see the clause above. One of the conditions to be met is that the exercise price is at least 85 % of the fair market value of the stocks. The employer cannot obtain tax deductions for the costs under the programme.

Other tax favourable opportunities for offering employees stocks exist.