CONSEQUENCES OF THE INTEL JUDGMENT AND THE NEW DANISH ACT ON STOCK OPTIONS

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1 Bech-Bruun Dragsted Law Firm Langelinie Allé Copenhagen Tel Fax Jette H. Ronøe Partner Our ref jhr/shs/jkl Dir. tel CONSEQUENCES OF THE INTEL JUDGMENT AND THE NEW DANISH ACT ON STOCK OPTIONS By the Intel judgment, the discussions of the legal status of stock options in Denmark, including the employer concept, have to a very large extent been put to a stop. By the decision a fairly precise framework has also been laid down for the interpretation of the employer concept in relation to the new Danish Act on stock options. Employer concept From a group employment law perspective, the general view has been that the main rule of company law is maintained to the effect that a legal entity which undertakes an obligation is the entity against whom claims may be raised. As for stock options, this should imply that if the legal relations were not mixed up, only the foreign parent company would as the legal entity which granted the options a general rule be held liable for the granting of stock options. There is no doubt that in several stock option plans, the person responsible for the administration of the plan has not been clearly defined. For instance, the manager of the Danish company has in some cases signed the notice of grants or the Danish company has been provided with a specific number of stock options from the parent company to be granted to the participants in the Danish company. In such cases, it is to be expected that the Danish company will be liable towards the employee. i:\ \000141

2 In the Intel case, the stock option plan was quite consistently administered centrally from the USA to the effect that all documents were sent from the US company directly to each individual employee. In the employment agreements, the Danish company recommended the employee for participation in the group plan comprising a total of 80,000 employees. In its reasoning, the Danish Supreme Court states that since the subsidiary recommended employees for participation in the group stock option plan, the stock options are to be considered an element of the employment relationship that the Danish company is liable. According to the new Danish Act on Stock Options, terminated employees are as a general rule entitled to keep their stock options. The legislators left the determination of the employer concept to the courts, but with the new Supreme Court decision, the Danish company will most likely be held liable as the employer, and the decision will presumably also affect all other benefits granted by a foreign parent company to the employees in the Danish subsidiary. In respect of group liability for benefits in employment relationships, Denmark consequently takes up an exceptional position compared to judicial decisions delivered in a number of other countries. Concept of salary In relation to the concept of salary, the Danish Supreme Court applies a very broad pay concept including any kind of remuneration paid within the employment and thereby the applied definition is similar to the broad definition of pay in EU law also known from cases of discrimination. This differs from the majority of judicial decisions delivered in Europe and is contrary to the recommendations of the European Commission. In its judgment, the Danish Supreme Court refers to an analogy of section 17 of the Danish Salaried Employees Act. This provision states as follows: "if a salaried employee who - by agreement or usage - is partly remunerated in the form of a share of profits, bonus, or similar payments leaves the enterprise during the currency of a financial year, he shall be entitled to a pro rata share, having regard to the length of his service during the financial year of the payment he would have received if he had been employed in the enterprise at the end of the financial year, or at the time when the payments are made." i:\ \

3 Up to now, the reason for the provision in section 17a of the Danish Salaried Employees Act has been that an employee should not be deprived of salary for work already performed although payment had not yet been effected. The Intel stock option plan provided i.a. for employees to be granted the so-called "new-hire/signon" stock options which cannot, according to their nature, constitute remuneration for work performed. In addition, one of the employees had only been granted an additional portion of stock options due to a decline in stock prices to increase the retention element. Under the Intel plan, it was also ascertained that an employee who was hired e.g. in March and an employee hired in November would prima facie be granted the same number of stock options in connection with the future grant of stock options in the month of April of the following year. Consequently, the stock options did clearly not constitute remuneration for work performed, but the stock options were granted on a strict retention basis. On the other hand, the plan was of a general nature to the effect that the employees could usually expect to be able to participate in the plan according to which stock options were granted once every year as previously mentioned. The Danish Supreme Court has decided that in principle, it is of no relevance whether a grant is made on the basis of work already performed or whether the grant is made for the purpose of retaining employees, and reference is made to an analogy of section 17a of the Danish Salaried Employees Act. However, the reference to section 17a is not easy to understand as the Danish Supreme Court has also decided that the employee acquires the definitive right to the stock options at the grant date even though no kind of work has yet been performed, and even though the plan presupposes final rights acquisition on the vesting date. This also implies that an employee who has only been employed with a company for two weeks will be entitled to all stock options granted as also stipulated in the new Danish Act on stock options. Furthermore, the decision implies that no special rules in relation to termination, such as the usual 90 days rules, can be upheld. i:\ \

4 In relation to the new Act, it should be noted that in general, fixed-term and part-time employees may not be treated differently from employees not working under fixed-term and full-time employment agreements occupying comparable positions, and this also applies to stock options. Ultimately, this means that any grant of stock options, for instance by way of so-called "newhire/sign-on" stock options, to employees occupying positions comparable to fixed-term and parttime employments will be contrary to Danish employment law if stock options are not also granted to fixed-term and part-time employees. The expiry of a fixed-term employment period is comparable to termination of employment. Consequently, an employee whose employment terminates because a fixed-term employment period expires will be entitled to keep any stock options granted also according to the new Danish Act on stock options. If the employer does not wish for fixed-term employees to receive and keep stock options - e.g. the so-called "new-hire/sign-on" stock options - it is of extreme importance that any general grant of options to all employees is not made until such employees have been employed for a certain period of time. Generally, stock options should not be granted until after approximately one year of employment. Valuation The Supreme Court judgment does not include a decision on the question of valuation, and the reason is that the employees have generally submitted that they were to keep the stock options as if they were still employed with the company. Alternatively, the employees submitted that the losses incurred by not having been granted stock options should be covered without specifying the method of calculating the losses. Each individual company may then decide whether it is able and willing to let the employees keep the stock options granted on the basis of the existing plan which may cause problems in relation to the price fixing if the stock options have already lapsed. An alternative scenario could be that a kind of phantom stock option plan is established on the basis of the original terms which plan is to cover former employees only. i:\ \

5 In the event that groups wish to settle the balance with the employee in cash, the question of valuation has, as mentioned in the foregoing, not been answered as, in the Intel case, the Union of Commercial and Clerical Employees in Denmark (HK) only made a claim for compensation of any loss, but did not specify how such loss should be calculated. In a number of cases, the unions have claimed that the loss must be calculated as the difference between the grant price and the price on the date when the employees notify the company that they would have exercised the options if they were still employed with the company. There is no doubt, however, that a number of unions will claim that the stock options should be valued on the basis of the Black & Scholes model. Finally, it should be noted that, on the basis of the Intel judgment, several unions now argue for an amendment of the Danish Act on Stock Options to the effect that the Act should also apply in the event of termination on the part of the employee. Conclusion In summery, on the basis of the Supreme Court judgment and the new Danish Act on stock options, a Danish employee who is granted options or subscription rights, even if such grant is made directly from a parent company - which is not the employing entity - shall be entitled to keep such options and subscription rights when the employee leaves the company irrespective of whether such employee was dismissed or has terminated its employment agreement provided however that the grant took place before 1 July If the grant took or takes place after that date, the employee will lose the options if he/she terminates the employment whereas the employee will be entitled to keep the options as if he/she was still employed if the employee is dismissed, unless such dismissal is due to breach on the part of the employee. Copenhagen, 29 November 2004 Jette H. Ronøe i:\ \