Stock-Based Incentive: The Danish Supreme Court Ruling in the Tesla Case

The Danish Stock Option Act – which applies to incentive schemes granting an employee the right, as part of the employment relationship, to purchase stocks or subscribe for newly issued stocks at a later date – was amended by the Danish Parliament with effect from 1 January 2019 (the “2019 Act”).

The primary purpose of the amendment was to introduce “freedom of contract” to regulate the handling of unexercised granted options in connection with the termination of the employment relationship. Before the amendment, the Stock Option Act (the “2004 Act”) included a mandatory provision that clearly defined who could be considered a good leaver versus a bad leaver.

As part of the revised Act, it was specified that the revised Act applies to schemes established before it entered into force (1 January 2019), provided that grants are made after the Act came into effect.

The case concerned three former employees (A, B and C) of Tesla Motors Denmark (TMD) whose employments were terminated in 2021.

The three employees were all part of a global incentive programme issued by Tesla, Inc. which consisted of a 2010 Plan and a 2019 Plan.

On 21 May 2018, employee A received 311 RSUs under an award agreement that referenced the 2010 Plan in the document title. On 22 January 2019, he was awarded an additional number of RSUs under an award agreement that also referenced the 2010 Plan.

On 22 January 2019 and 21 September 2020, employee B received several stock options under an award agreement that referred to the 2010 Plan.

As for employee C, on 22 January 2019, he received a series of RSUs under an award agreement that also referenced the 2010 Plan. Additionally, on 21 September 2020, C received a series of stock options under an award agreement that referenced the 2019 Plan.

Two of the employees, A and C, were informed that they would be paid an amount equal to the intended value of unvested RSUs and stock options upon their exit from TMD.

The last employee, B, however, was informed that his stock options under an award agreement referring to the 2010 Plan were cancelled.

The former employees claimed that the 2004 Act regulated the incentive scheme to which they were subject and that, according to the rules of that Act, they retained the rights in any options to purchase and subscription rights granted, but not yet exercised, in the event of termination of their employment, provided that the employee could be considered a “good leaver”. In this connection, A, B and C also claimed that they were all good leavers.

Conversely, TMD argued that the 2019 Act applied to the grants as the 2010 Plan, which was regulated by the 2004 Act, had lapsed by the end of 2020. In addition, TMD claimed that the three employees were to be considered “bad leavers”.

The case before the Maritime and Commercial High Court concerned whether the case should be decided under the 2004 Act or the 2019 Act.

As far as employee A was concerned, the Maritime and Commercial High Court found that the grant of RSUs on 21 May 2018 and 22 January 2019, respectively, took place concerning the 2010 Plan. The grants thus took place under a scheme established before 1 January 2019, and both grants were therefore deemed to be subject to the 2004 Act.

As for the two other employees, B and C, their stock options were granted concerning the 2019 Plan, which was amended according to the 2019 Act. The question was therefore whether the 2019 Plan constituted a new scheme or merely a change to an existing scheme.

The Maritime and Commercial High Court found that the 2019 Plan had essentially the same contents as the 2010 Plan, since it did not contain any significant, material changes that could lead to the establishment of a new scheme subject to the 2019 Act.

The Maritime and Commercial High Court therefore concluded that all three employees were subject to the 2004 Act and were entitled to the market value of any unvested RSUs and stock options.

In addition, the employees were awarded compensation of DKK10,000 for not having received the employer statements required.

The Supreme Court found that the decisive factor in determining whether the 2019 Act applies is the point in time when the employer has given a legally binding promise regarding the employee’s right to purchase or subscribe for stocks at a later date.

In the specific case, the Supreme Court found that the plans did not contain a binding promise from Tesla, Inc. regarding the allocation of purchase or subscription rights that individual employees could rely on.

The key factor was that A and B only acquired the right to the disputed RSUs and stock options through the grant agreements of 22 January 2019 and 21 September 2020.

On this basis, the Supreme Court found that the grants were covered by the 2019 Act. TMD was therefore acquitted of A’s and B’s claims for payment of the value of the RSUs and stock options.

However, the Supreme Court awarded A and B compensation of DKK2,500 each for not receiving the required employer declarations.

The ruling provides a significant interpretative contribution regarding what is required for an incentive programme based on a scheme initiated before the amendment of the Stock Option Act to be considered as established after the 2019 Act came into force.