I INTRODUCTION

Many aspects of the Danish regulatory regime and applicable restrictions will depend on and refer back to a basic distinction in Danish employment law, namely whether the executive in question is subject to the Danish Salaried Employees Act.2

In general, only executives who hold an independent overall management position in respect of the day-to-day affairs of the company and in general those who are registered as part of the management branch of the two-tier management system generally applied by Danish companies (‘registered executive management’) are exempt from the provisions of the Salaried Employees Act.

The distinction appears in many aspects of the regulation referenced below. Notably, executives who are subject to the Salaried Employees Act will also enjoy the protection afforded by the Danish Stock Options Act,3 restrictive covenants undertaken by them will be subject to the Danish Employment Clause Act,4 and their remuneration will not be subject to the approval requirements of the Danish Companies Act.5

For financial businesses remuneration restrictions are set out in the Danish Financial Business Act.6 The remuneration restrictions apply to members of the board of directors, registered executive management and such employees who due to their position and scope of responsibilities are designated by the board of directors of the company as ‘risk takers’ (MRT).

II TAXATION

i Income tax for employees

Employees, whether executives or registered executive management, resident in Denmark for tax purposes are taxed on their remuneration as personal income. Employees resident in Denmark are fully liable for taxes on their global income. Non-resident employees may be subject to limited tax liability if they perform services in Denmark for a company based in Denmark.

Personal income tax is levied on a net-income principle, meaning that taxes are levied after deduction of relevant qualifying costs spent on obtaining and securing the income.

Income is generally taxed when the employee obtains a final legal right to the income. However, if payment is delayed, the tax liability can be postponed for up to six months. At what point a legal right is obtained depends on the underlying agreement or applicable legislation. If the award of taxable income is subject to suspensory conditions, the time of taxation may be deferred.

Personal income is taxed at up to 56 per cent including a mandatory labour market contribution. All employees have an annual personal allowance in their personal income of 45,000 kroner, which is exempt from tax.

Capital gains on shares up to 51,700 kroner (2017) are taxed at a rate of 27 per cent, while sums exceeding this are taxed at 42 per cent. These rates are under renewed political review with the intention of lowering the applicable rates.

Generally, personal income consists of cash remuneration including cash bonuses, benefits (e.g., company car, telephone, internet and newspaper), shares and options. Severance pay made as a result of termination of employment is, with a few modifications, taxed as personal income.

As a rule, remuneration received in the form of shares, options, warrants, etc., is taxed as personal income at up to 56 per cent. The remuneration is taxed when the employee obtains a final legal right to it. However, there are two different schemes in place to allow for deferral of taxation or a reduced tax rate.

One scheme, applicable to all employees and members of the board of directors, allows for remuneration in options and warrants to be subject to a deferred tax payment so that taxes are not levied until the options or warrants are exercised. The income is still taxed as personal income. The employer can deduct the costs of such remuneration, as described in Section III, infra.

Options/warrants

Restricted stock

Restricted stock unit (promise to deliver stock in the future)

Tax treatment upon grant?

No tax (under certain conditions)

No tax (under certain conditions)

No tax (under certain conditions)

Tax treatment upon obtaining a final legal right?

No tax (under certain conditions)

Personal income tax up to 56 per cent

Personal income tax up to 56 per cent

Tax treatment upon exercise?

Personal income tax up to 56 per cent

No tax (under certain conditions)

No tax (under certain conditions)

Tax treatment upon sale of underlying shares?

Personal income tax up to 56 per cent

Capital gains tax up to 42 per cent

Capital gains tax up to 42 per cent

Under certain conditions employee share programmes may qualify for another more favourable tax treatment, which is described in the table below. Under this scheme taxation is both deferred and reduced to the capital gains rate.

Options/warrants

Restricted stock

Restricted stock unit (promise to deliver stock in the future)

Tax treatment upon grant?

No tax (under certain conditions)

No tax (under certain conditions)

No tax (under certain conditions)

Tax treatment upon vesting?

No tax (under certain conditions)

No tax (under certain conditions)

No tax (under certain conditions)

Tax treatment upon delivery?

No tax (under certain conditions)

No tax (under certain conditions)

No tax (under certain conditions)

Tax treatment upon sale of underlying shares?

Capital gains tax up to 42 per cent

Capital gains tax up to 42 per cent

Capital gains tax up to 42 per cent

To qualify for this tax treatment a number of conditions must be met. These include the following:

      • a The tax scheme only applies to employees rendering personal services in an employment relationship. Members of the board of directors, consultants, etc., are not considered employees under the scheme.
      • b The remuneration must consist of shares, share options or share warrants and must be granted to the employee personally. Thus, the employee cannot receive the shares etc. through a holding company.
      • c The awarded shares, etc., may not constitute a separate class of shares (i.e., the granting company cannot create a separate class of shares specifically for employees under the scheme).
      • d The discount value (benefit) of the shares, etc. may not exceed 10 per cent of the employee’s annual total remuneration.

The discount value (benefit) of shares, etc., is calculated differently depending on the type of remuneration and the terms of the share award plan. The discount value is assessed at the time when the actual exercise price or purchase price is known and at the latest when the employee obtains a final legal right to the shares, etc.

ii Social taxes for employees

Generally, all social contributions are included in taxpayers’ income taxes. This includes the above-mentioned mandatory labour market contribution, which, unlike income taxes, is levied on the gross income. In addition employees and employers pay a minor amount annually to a mandatory labour market pension scheme.

The employer is required to include the value of share and cash remuneration in the basis for payroll taxes.

iii Tax deductibility for employers

The general rule for deductibility of costs is that Danish companies can deduct costs incurred to acquire, secure and maintain the income. Costs related to remuneration that satisfy this criterion are consequently deductible. This includes bonuses and severance pay. No general distinction is made between ranks and titles regarding deductibility.

Dividends are not deductible. The employer can deduct an amount equal to the discount given to the employee in relation to shares, options and warrants. The deduction is made in the year in which the employer has incurred the costs (i.e., when the employee obtains a final legal right to the discounted value).

Costs related to employee share programmes under the most favourable tax scheme (see Section III), are specifically excluded from deduction by the employer.

iv Other special rules

Pension contributions made by the employer on behalf of the employee are under certain conditions tax free for the employee. Withdrawals from the pension scheme are taxed later on.

Benefits included in the employee’s remuneration package are taxed as personal income. Generally, the value of these is set at the market value of the specific usage.

Members of the board of directors are taxed personally on board fees and generally cannot allocate the fee to a company. Only in very special cases has allocation to a company been accepted by the Danish tax authorities.

III TAX PLANNING AND OTHER CONSIDERATIONS

Under certain conditions, non-resident key employees can be recruited to work in Denmark, and become resident in Denmark for tax purposes and qualify for a preferential tax treatment. Employees who qualify for the scheme are taxed at an effective rate of approximately 32 per cent including labour market contribution. The maximum period for taxation under the scheme is 60 months.

Only employees who have not been liable to pay taxes in Denmark for the past 10 years can qualify. The key employees are not allowed to have a controlling influence on the employer company and cannot hold more than 25 per cent of the share capital or 50 per cent of the votes in the employer company.

IV EMPLOYMENT LAW

i Severance terms

The Salaried Employees Act provides for statutory notice periods and a certain protection in case of termination of employment.

The notice to be given by the company can be up to six months to the end of a month depending on seniority. The executive may terminate the employment with one month’s notice to the end of a month, regardless of seniority. It may, however, be agreed in writing that a longer notice must apply, provided the notice to be given by the company is extended correspondingly. Such prolongation is commonly agreed for senior executives.

The Salaried Employees Act also provides for statutory severance pay. Accordingly, a salaried employee who has been continuously employed for 12 and 17 years is entitled to severance pay corresponding to one or three months’ salary, respectively, when the employment is terminated by the company.

A salaried employee who is dismissed without just cause, and who has been employed for at least one year at the time of dismissal, is entitled to compensation for unfair dismissal.

Provided the executive has reached the age of 30, the maximum compensation equals three months’ salary. The maximum compensation is increased to four and six months’ salary after 10 and 15 years’ seniority, respectively. Maximum compensation is seldom awarded.

Executives may also be entitled to certain severance terms provided by collective bargaining agreements, notably the managers’ agreement.

For registered executive management, both the length of the respective notice periods and the right to severance pay (if any) are based solely on agreement.

ii Right to bonus in connection with termination of employment

Under Danish employment law, variable remuneration is generally governed by two separate sets of rules: Section 17a of the Salaried Employees Act, and the Stock Options Act. Neither of these sets of rules applies to registered executive management.

Section 17a of the Salaried Employees Act applies to cash bonus schemes and provides that executives are entitled to pro rata bonuses for the bonus period in which termination becomes effective, irrespective of the fact that the employment ends during the bonus year or before the time of payment.

Bonus criteria presupposing that the executive is not under notice at the time of payment or employment during a full calendar year are generally not enforceable. Accordingly, an executive eligible for bonus whose employment ends during a financial year or before the time of payment is entitled to a pro rata share of the bonus he or she would have received if he or she had been employed at the end of the financial year or at the time when the bonus is paid – provided that applicable bonus targets are met.

In a recent decision, the Supreme Court has confirmed, as assumed by practitioners, that the pro rata principle applies also to stay-on bonuses and the court has resisted a possible tendency to materially modify such pro rata principle.

When calculating the length of employment, the entire notice period (including periods of garden leave) is included. The right to pro rata bonus applies irrespective of whether the employment is terminated by the company or the executive and irrespective of whether the termination is considered to be with just cause.

The Stock Options Act applies to stock option schemes where the time of the grant and the time of exercise are not identical. The act presupposes that the exercise of an option results in ownership of an actual share meaning that, for example, phantom shares are not governed by the act.

Unlike Section 17a of the Salaried Employees Act, the Stock Options Act distinguishes between good-leaver and bad-leaver scenarios.

If the executive is considered a ‘bad leaver’, typically because the executive terminates his or her position to take up other employment or because the company dismisses or summarily dismisses the executive due to breach of employment, the executive will, as of expiry of the notice period, forfeit unexercised options and will have no right to be awarded further options.

If the executive is considered a ‘good leaver’, typically because the company terminates the employment for reasons other than the executive’s breach, the executive retains the options granted and the right to exercise these on applicable option terms. Further, the executive will, with certain modifications, be entitled to a pro rata share of the options to which the executive would have been entitled had the employment not been terminated.

iii Restrictive covenants

New and stricter regulation on restrictive covenants came into force in 2016. With the exception of clauses for registered executive management, the Employment Clause Act applies to all non-competition and non-solicitation clauses entered into on or after 1 January 2016. In order for the clauses to be valid and enforceable, they must comply with detailed information and compensation requirements.

Under the Employment Clause Act, only exceptionally trusted employees can be subject to non-competition and non-solicitation clauses. Further, it is no longer possible to enter into non-poaching clauses in individual employment agreements. Non-competition and non-solicitation clauses entered into prior to 1 January 2016 in accordance with the previous rules will remain valid. Existing non-poaching clauses may be maintained until 1 January 2021, after which date they will become invalid.

The maximum periods allowed for non-competition and non-solicitation clauses are six to 12 months (after expiry of the notice period) and the executives are entitled to compensation of 40 to 60 per cent of the remuneration during the period in which the clauses apply. Compensation for the first two months is fixed, however, as of the third month; the compensation will decrease to 16 or 24 per cent, respectively, if the executive commences other suitable employment.

For both registered executive management and executives, Danish law provides for a special rule on lapse of non-competition clauses. Accordingly, a non-competition clause becomes ineffective if the employment is terminated by the company without the executive having given just cause for such termination, or if the executive terminates the employment and the company’s failure to meet its obligations provides just cause for such termination. Non-competition clauses are therefore often combined with a non-solicitation clause, as such clause remains in force irrespective of the reason for the termination. Regardless of the lapse of the non-competition clause, an executive subject to the Employment Clause Act will be entitled to a minimum compensation.

V SECURITIES LAW

After implementation of the Market Abuse Regulation, it is no longer a formal requirement for companies whose securities are listed on Nasdaq Copenhagen A/S (Nasdaq Copenhagen) to prepare internal rules for its members of the board of directors and employees trading in the company’s securities. The former requirements in this respect of the Danish Securities Trading Act and the Nasdaq Copenhagen Rules for Issuers have been repealed. The Nasdaq Copenhagen Rules for Issuers, however, still recommend that such internal rules are in place as a minimum, reflecting the Regulation rules on closed trading windows and considering whether further restrictions are relevant. It remains quite standard for Danish-listed companies to have such rules.

Members of the board of directors, registered executive management of listed Danish companies as well as higher-ranking executives, to be identified by the company based on their position, responsibilities and exposure to confidential information, are obliged to report their trading and that of their relatives in company securities. The transactions subject to reporting are those listed in Article 10 of Commission Delegated Regulation 2016/522. The methods for reporting are those set out in Commission Implementing Regulation 2016/523.

VI DISCLOSURE

The Companies Act does not provide a general obligation on Danish companies to disclose executive remuneration. For listed companies (see below), a corporate governance recommendation applies to the effect that the company should disclose the individual remuneration of members of the board of directors and registered executive management. These rules are set to change when Directive 173/17 becomes applicable.

For companies listed on Nasdaq Copenhagen, the rules applicable to issuers provide that the company must publicly disclose any decision to introduce a share-based remuneration programme for registered executive management and other employees, including the dilution effect of the programme. The disclosure is generally required to include specifics about:

  • a the types of share-based remuneration;
  • b the groups of persons encompassed by the programmes; and
  • c timing, scope and total number of shares and the period within which the programmes can be exercised, along with strike price and information on conditions to be fulfilled under the programmes, and the aggregate market value of the share-based incentive programme.

The disclosure obligation relates to share-based and synthetic programmes and thereby also apply to cash or cashable programmes tied to the share price. The disclosure requirement is fulfilled by a company announcement. There is no requirement to publish plan rules or individual agreements or to summarise these in any greater detail.

The Danish Financial Statements Act7 provides that Danish companies encompassed by accounting class C and D must in their financial statement specify the aggregate remuneration, etc. for the financial year to current and former members of the board of directors and registered executive management, as well as any obligations to provide pension for those groups.

If a separate incentive programme exists for members of the board of directors or the registered executive management, the category of members of the board of directors or executives encompassed, the type of remuneration and information necessary to determine the value thereof must be included.

Information shall be provided for the year of the financial statements and the previous year, but only on a functions level and not an individual level.

VII CORPORATE GOVERNANCE (RELATING TO EXECUTIVE REMUNERATION ONLY)

The Companies Act contains the fundamental corporate rules for both private and public limited companies.

The Act states, inter alia, that the members of the board of directors or the supervisory committee, and registered executive management may receive either fixed or variable remuneration. Irrespective of form, the remuneration (1) cannot exceed an amount that is considered ‘ordinary’ with respect to the character and activity of the company and (2) must be ‘financially reasonable’ with due regard to the company’s financial position. If the company is the parent company of a group, remuneration to registered executive management must be financially reasonable with due regard to the financial position of the group as a whole. These basic principles apply to all private and public limited companies.

When considering whether the remuneration is ‘ordinary’, reference can be made to what is being paid to registered executive management in comparable companies for similar management tasks. The requirement that any remuneration must be financially reasonable with due regard to the company’s financial position shall help ensure that the company has the resources to pay the specific remuneration, and that no payments to registered executive management are made to the detriment of the interests of the company’s stakeholders.

If a company is declared bankrupt, a statutory clawback provision entails that registered executive management must pay back any variable remuneration received up to five years prior to the date of declaration of bankruptcy, provided that the company was insolvent when the variable remuneration was determined. The clawback obligation applies even if variable remuneration was received in good faith.

For public limited companies additional requirements apply. Nasdaq Copenhagen has issued Rules for Issuers of Shares as last amended in July 2016. According to these rules, the company must specify the extent to which it complies with the Danish Recommendations on Corporate Governance. The recommendations were issued by The Committee on Corporate Governance in 2013 and later amended in November 2014. The recommendations are currently under review, see below. The recommendations are ‘soft law’. Companies may opt out of provisions in the recommendations according to a ‘comply-or-explain’ principle. The purpose of this principle is to ensure that all deviations from the recommendations are explained and made visible to the market, and to allow for flexibility in respect of the company’s specific circumstances. Accordingly, the recommendations are not directly enforceable, but for the companies listed on Nasdaq Copenhagen, the recommendations must be adhered to (unless the company has opted out). The comply-or-explain principle is also reflected in the Financial Statements Act.

The Recommendations on Corporate Governance contain ‘best practice’ recommendations for the board of directors and registered executive management of public listed companies; however, in practice the recommendations have a broader application as some non-listed companies choose to comply with some or all of these recommendations as well.

According to the recommendations, the company’s board of directors should appoint a remuneration committee to (1) recommend a policy on executive remuneration, including ‘General guidelines for incentive pay’ for all members of the board of directors and registered executive management, (2) make proposals for the remuneration of the board of directors and registered executive management and supervise compliance with the remuneration policy, and (3) prepare the remuneration policy of the company.

If the company’s executive remuneration consists of variable remuneration in the form of incentive schemes it is a specific requirement according to the Companies Act that the company also adopts a provision in its articles of association stating that the company has adopted such policy on incentive schemes. The policy must be approved by the shareholders at the general meeting and made available on the company’s website stating the date of approval by the general meeting. Individual agreements to provide variable remuneration according to the policy cannot be entered into until the day after the approved policy has been made public on the company’s website. Otherwise such agreements will be deemed invalid. Amendments to existing agreements on executive remuneration that are not in accordance with the policy will also be deemed invalid.

With regard to the contents of the policy on executive remuneration with variable components, the Committee recommends, inter alia, that fixed limits are set on the variable components of the total remuneration, and that there is clarity about performance criteria and measurability for the variable components of the remuneration. Furthermore, it is recommended that the board of directors ensure that any vesting of variable parts of an individual agreement on executive remuneration extends to more than one calendar year. Variable remuneration should be based on realised results over an extended period so as to not incentivise short-term and risky behaviour. It is also recommended that variable remuneration is made subject to clawback in exceptional cases when payment has been made on the basis of information later shown to be inaccurate.

The Committee recommends that members of the board of directors are not paid with stock options or warrants. It is not contrary to the recommendations for members of the board of directors to receive shares in the company (at market value) as part of their executive remuneration.

If the company adopts a share-based executive remuneration programme it is recommended by the Committee that rewards are granted periodically and should have a duration of at least three years from the date of grant before any subscription of shares or options can be exercised.

The recommendations also include a recommendation that the pay of each individual member of the board of directors and the registered executive management is specified in the company’s financial statement.

Among Danish large and mid-cap companies the level of compliance with the recommendations is above or around 90 per cent, while the recommendation concerning disclosure of individual remuneration is among the recommendations least complied with.

The recommendations are currently under review pursuant to a proposal of 7 July 2017. With respect to remuneration, the proposed revisions include a recommendation that the remuneration policy be revised and approved at the general meeting every four years and should be available on the company web site. It is recommended that variable components of remuneration be subject to capped absolute values. Furthermore, it is proposed that share-based remuneration be subject to a vesting period of no less than three years from the time of grant.

The information on remuneration of individual members of the board of directors and registered executive management is recommended to be formalised in a separate remuneration report, and it is recommended that such report also specify the key components of any retention and severance arrangements, see also Directive 173/17.

The revised recommendations are expected to be approved during the second half of 2017 to become applicable as at 1 January 2018.

VIII SPECIALISED REGULATORY REGIMES

Denmark has adopted rules to implement the EU Capital Requirements Directive IV. The rules are incorporated in the Financial Business Act. The rules are applicable to the financial sector broadly, including banks, insurance companies and securities businesses. The rules apply to the board of directors, registered executive management and employees deemed ‘risk takers’ (MRT).8

The rules relate to financial businesses subject to Danish financial supervision. The key components of the limitations on remuneration are the following:

  • a Variable remuneration must not exceed 50 per cent of fixed remuneration (including pension) for the board of directors and registered executive management.
  • b Variable remuneration for MRTs must not exceed 100 per cent of fixed remuneration (including pension). The board of directors may under certain conditions apply an exemption and allow the variable remuneration to MRTs to amount to up to 200 per cent of fixed remuneration.
  • c No less than 50 per cent of variable remuneration must consist of a balanced mix of shares, share based instruments, or other instruments (e.g., subordinated debt) reflective of the company’s credit standing.
  • d Payment of not less than 40 per cent of variable remuneration (60 per cent if the amount is ‘substantial’) should be deferred over a three-year period commencing one year after the time of determination of the amount. For the board of directors and registered executive management, the deferral period is four years. The sequence of release of the payment may not be front-loaded.
  • e Clawback rules must apply if the company at the time of payment does not comply with capital or solvency requirements as applicable.
  • f For the board of directors and registered executive management, stock options and similar instruments must not account for more than 12.5 per cent of the fixed remuneration.

Appropriate lock-up provisions must apply to shares or instruments as successively released, and the recipient must not hedge the risk attached to such shares and instruments pending release.

The company must ensure that the criteria forming the basis for determination of the variable remuneration remain fulfilled at the time of payment, and that the recipients remain in good standing and have not been responsible for behaviour causing considerable losses for the company, and that the company’s financial situation has not materially deteriorated from the time of calculation of the variable remuneration.

IX DEVELOPMENTS AND CONCLUSIONS

The focus on remuneration for registered executive management of listed companies remains strong and the level of transparency is generally increasing also due to the Recommendations on Corporate Governance and the currently proposed revisions thereto.

Last year’s implementation of new and stricter legislation in respect of restrictive covenants was expected to influence contract practice on the scope of restrictive covenants applied to registered executive management not subject to the statutory requirements. Additionally, it was debated whether market practice on the length of restrictive periods applied to registered executive management and the payment of compensation would converge with the requirements of the legislation. No firm conclusion can yet be reached on this point.

It also remains to be seen whether the increased restrictions on formally agreed restrictive covenants will affect the courts’ view concerning protection of trade secrets and the executives’ general duty of loyalty. Within the area otherwise protected by restrictive covenants, this regulation has traditionally been considered secondary.

1 Morten Skjønnemand is a partner, and Lars Fogh and Ditte Grundtvig Larsen are associates at Gorrissen Federspiel.

2 Consolidation Act No. 81 of 3 February 2009.

3 Consolidation Act No. 309 of 5 May 2004.

4 Act No. 1565 of 15 December 2015.

5 Consolidation Act No. 1089 of 14 September 2015.

6 Consolidation Act No. 174 of 31 January 2017.

7 Consolidation Act No. 1580 of 10 December 2015.

8 Members of the broader executive group and employees in charge of key functions, including financial, legal, tax, HR and remuneration matters as well as employees who as a result of their function prepare or make decisions concerning the risk profile of the business.