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 a 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 Act4 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 boards 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 resident in Denmark for tax purposes, whether executives or registered executive management, are taxed on their remuneration as personal income. Employees resident in Denmark are fully liable for taxes on their worldwide income. Non-resident employees may be subject to limited tax liability if they perform services in Denmark.

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

Generally, income is taxed when an 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 56.5 per cent (2019) including a mandatory labour market contribution (8 per cent). All employees over 18 years of age have an annual personal allowance in their personal income of 46,200 kroner (2019) that is exempt from tax.

Capital gains on shares up to 54,000 kroner (2019) are taxed at a rate of 27 per cent, while sums exceeding this amount are taxed at 42 per cent. These rates are under continued political review with the intention of lowering the applicable rates.

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

As a general rule, remuneration received in the form of, inter alia, shares, options and warrants is taxed as personal income at up to 56.5 per cent (2019). 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 boards 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 subsection iii.

Options/warrants Restricted stock unit (promise to
deliver stock in the future)
Tax treatment upon grant? 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 56.5%
Tax treatment upon exercise? Personal income tax up to 56.5% No tax (under certain conditions)
Tax treatment upon sale of underlying shares? Personal income tax up to 56.5% Capital gains tax up to 42%

Under certain conditions, employee share programmes may qualify for a 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 unit (promise to
deliver stock in the future)
Tax treatment upon grant? No tax (under certain conditions) No tax (under certain conditions)
Tax treatment upon vesting? No tax (under certain conditions) No tax (under certain conditions)
Tax treatment upon delivery? No tax (under certain conditions) No tax (under certain conditions)
Tax treatment upon sale of underlying shares? Capital gains tax up to 42% Capital gains tax up to 42%

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

  1. the tax scheme only applies to employees rendering personal services in an employment relationship. Members of boards of directors, consultants, etc., are not considered employees under the scheme;
  2. the remuneration must consist of shares, share options or share warrants and must be granted to employees personally. Thus, employees cannot receive shares, etc., through a holding company;
  3. 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); and
  4. the discount value (benefit) of the shares, etc., may not exceed 10 per cent of an employee's annual total remuneration. However, if it is a general scheme for employees, the discount value (benefit) of the shares, etc., cannot exceed 20 per cent of an employee's annual total remuneration.

The discount value (benefit) of, inter alia, shares 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 relevant 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.

Employers are 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. Employers can deduct an amount equal to the discount given to an 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 II(i)) are specifically excluded from deduction by employers.

iv Other special rules

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

Benefits included in an 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 boards of directors are taxed personally on board fees, and as a general rule they 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 32.84 per cent including a labour market contribution (2019). It is a gross tax; consequently, no deductions are allowed in the income taxed under the scheme. The maximum period for taxation under the scheme is 84 months.

Only employees who have not been liable to pay taxes in Denmark for the past 10 years can qualify. 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 cases of termination of employment.

The notice to be given by a company can be up to six months to the end of a month depending on seniority. An 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 a 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.

The Supreme Court has confirmed, as assumed by practitioners, that the pro rata principle applies also to stay-on bonuses, and the Court has thereby 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 a 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 in which 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.

Until 31 December 2018, the Stock Options Act included a statutory distinction between good leavers and bad leavers. Employees who would terminate their employment or whose employment would be terminated by an employer due to misconduct would forfeit outstanding options at the end of employment.

Contrarily, employees whose employment was terminated by an employer or who would terminate the employment due to breach by the employer would have a mandatory right to retain their outstanding options and to exercise them on the terms under which they were originally granted.

With effect from 1 January 2019 for programmes established after that date, the mandatory distinction between good leavers and bad leavers has been abolished in favour of increased freedom of contract, and the treatment of leaver scenarios and any right to new grants in the year of termination are no longer subject to statutory or mandatory rules.

The amended Stock Options Act introduces a prohibition on agreements between an employer and an employee that entitles the employer to buy back shares acquired pursuant to the exercise of options under the Act at a price lower than market price.

iii Restrictive covenants

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. 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 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 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 an 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 an employment is terminated by a company without the executive concerned 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 a non-competition clause, an executive subject to the Employment Clause Act will be entitled to a minimum compensation.

V SECURITIES LAW

Following the 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 the members of their boards of directors and employees trading in their 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 boards of directors and the 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 companies should disclose the individual remuneration of members of their boards of directors and registered executive management. These rules are set to change when the implementation of Directive 2017/828 becomes effective.

For companies listed on Nasdaq Copenhagen, the rules applicable to issuers provide that companies 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:

  1. the types of share-based remuneration;
  2. the groups of persons encompassed by the programmes; and
  3. the 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 applies 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, inter alia, the aggregate remuneration for the financial year to current and former members of their boards of directors and registered executive management, as well as any obligations to provide pensions for those groups.

If a separate incentive programme exists for members of a board of directors or registered executive management, the category of members of the board of directors or executives encompassed, and 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

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

The Act states, inter alia, that the members of boards of directors or supervisory committees and registered executive management may receive either fixed or variable remuneration. Irrespective of form, the remuneration cannot exceed an amount that is considered ordinary with respect to the character and activity of a company, and 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 a 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 January 2018. According to these Rules, companies must specify the extent to which they comply with the Danish Recommendations on Corporate Governance or the recommendations on corporate governance that apply in the country where they have their domicile. The Danish Recommendations were issued by the Committee on Corporate Governance in 2013, and later amended in November 2014 and 2017. 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 a company's specific circumstances. Accordingly, the Recommendations are not directly enforceable, but for companies listed on Nasdaq Copenhagen, the Recommendations must be adhered to (unless a 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 boards of directors and registered executive management of public listed companies; however, in practice the recommendations have a broader application as some non-listed companies also choose to comply with some or all of these recommendations.

According to the Recommendations, a 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;
  3. prepare the remuneration policy of the company; and
  4. assist with the preparation of the annual remuneration report.

If a 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 a 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 it is ensured that variable remuneration shall not only consist of short-term remuneration components, and that long-term remuneration components must have a vesting or maturity period of at least three years. 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 boards of directors are not paid with stock options or warrants. This is not contrary to the recommendations for members of boards of directors to receive shares in a company (at market value) as part of their executive remuneration.

If a 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 boards of directors and the registered executive management is specified in companies' financial statements.

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 also include a recommendation that remuneration policies be revised and approved at general meetings every four years, and that they should be available on company websites. The information on remuneration of individual members of boards 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 2017/828.

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 MRT.8

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

  1. variable remuneration must not exceed 50 per cent of fixed remuneration (including pensions) for boards of directors and registered executive management;
  2. variable remuneration for MRTs must not exceed 100 per cent of fixed remuneration (including pensions). Boards of directors may under certain conditions apply an exemption and allow the variable remuneration of MRTs to amount to up to 200 per cent of fixed remuneration;
  3. 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 a company's credit standing;
  4. 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 boards of directors and registered executive management, the deferral period is four years. The sequence of release of the payment may not be front-loaded;
  5. clawback rules must apply if a company at the time of payment does not comply with the capital or solvency requirements as applicable; and
  6. for boards 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 recipients 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 also generally increasing due to the Recommendations on Corporate Governance and the recent revisions thereto.

On 10 June 2019, the amended Shareholder Rights Directive II (SRD II), which was implemented into Danish law on 4 April 2019, entered into force. According to the new legislative framework, shareholders of listed Danish companies have a right to vote on the remuneration policy of a company and a right to vote on a remuneration report providing an overview of remuneration paid to a company's management and board of directors (advisory vote only). The shareholders' right to vote on the remuneration policy is, in practice, already incorporated into most Danish listed companies' general meetings as similar requirements are set out in the Danish corporate governance recommendations.

Compared to the current Danish corporate governance recommendations, the new rules regarding remuneration policies and remuneration reports are more detailed. Irrespective of the new rules not being applicable for annual general meetings convened in financial years that began before the 10 June 2019 deadline, there has been an increased focus on remuneration policies and reports among large companies. We expect that more companies will prepare and disclose remuneration reports prepared in accordance with the new legislative framework during this year. As these remuneration reports contain detailed information on a company's pay structure, the remuneration reports may be expected to attract the attention of a larger number of stakeholders, including shareholders, potential investors as well as the directors and executive officers themselves.

With effect from 1 January 2019 for programmes established after that date, the Stock Options Act was substantially changed. Accordingly, the previous mandatory protection of good leavers has been abolished in favour of increased freedom of contract, and the treatment of leaver scenarios and any right to new grants in the year of termination are no longer subject to statutory or mandatory rules. The amended Stock Options Act further introduces a prohibition on agreements between employers and employees that entitles an employer to buy back shares acquired pursuant to the exercise of options under the Act at a price lower than market price. Due to these changes, we anticipate that we will see an increase in legal proceedings over the coming years, as further guidance will have to be provided through case law.


Footnotes

1 Morten Skjønnemand and Jakob Skaadstrup Andersen are partners and Ditte Grundtvig Larsen is an associate at Gorrissen Federspiel.

2 Consolidation Act No. 1002 of 24 August 2017, as amended.

3 Consolidation Act No. 309 of 5 May 2004, as amended.

4 Act No. 1565 of 15 December 2015, as amended.

5 Consolidation Act No. 1089 of 14 September 2015. as amended.

6 Consolidation Act No. 467 of 24 April 2019, as amended..

7 Consolidation Act No. 1580 of 10 December 2015, as amended.

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 a business.