The stock options’ Achilles heel

Towards the end of 2018, an employee and a company agreed to grant the employee stock options while he was employed. At the beginning of 2019, the remaining terms, such as the exercise price and the vesting period, were agreed upon and finalised.

The question before the Eastern High Court was whether the stock options agreement was regulated by the old or new rules. The rules were significantly changed for schemes established after 1 January 2019. Under the old rules, the employee could keep all his stock options. Under the new rules, all unvested options would lapse if the employment ended. 

Entitlement to vested stock options

The Eastern High Court concluded that the final agreement on stock options was established at the beginning of 2019 and, therefore, was covered by the new rules. This was based on the agreement on stock options being unable to be seen as established before the exercise price and the vesting period were agreed upon and finalised, even though the rest of the agreement was entered into at the end of 2018.

This meant that the employee was entitled to exercise the options that had vested until his termination.

IUNO’s opinion

The ruling shows that an agreement to grant stock options is only final once the most essential terms have been established. The time of the agreement’s conclusion is decisive for which rules apply. We have previously written about a similar ruling in which the Danish Maritime and Commercial High Court forgot to distinguish between agreements and plans here.

IUNO recommends that companies that offer stock options and similar schemes to their employees should be aware of the timing at which the schemes are established and when the agreements have been made. Depending on the course of events, stock options may be covered by either the old or new rules.

[The Eastern High Court’s judgement of 19 January 2024 in case BS-8780/2022-OLR]