Supreme Court deems repurchase clause invalid

In a judgment of 23 June 2011 the Danish Supreme Court deemed a clause regarding buy-back of shares unreasonable and therefore invalid pursuant to Section 36 of the Contracts Act. The case demonstrates that employers need to carefully consider the wording of repurchase clauses when preparing employee share schemes.

The case concerned executives in a company who had the opportunity to participate in a share scheme. The shares were acquired at a market price and were to be sold back to the company in the event of the executive resigning from his position. The sell-back price would depend on (i) the length of the period since the purchase of the shares and (ii) the reasons for the termination of the individual employment relationship ie whether the executive in question was considered a "good leaver" or a "bad leaver".

Approximately one year after the acquisition of the shares, the executive was dismissed for a reason unrelated to any action on his part. Under the terms of the repurchase clause the executive was required to sell back the shares at the original purchase price but he refused to do so. He then brought an action against the employer claiming he was entitled to keep the shares, on the grounds that the repurchase clause was inconsistent with section 17a of the Salaried Employees Act, the provisions of the Share Option Act and section 36 of the Contracts Act.

The Supreme Court gave judgment in favour of the executive and disregarded the repurchase clause, upholding the executive’s claim that he was entitled to keep the shares as if still employed by the company.  The Court’s reason for declaring the clause invalid was that it was unreasonable to require the executive to sell back shares at the original purchase price (which could be below market price) when the termination of the employment relationship was not due to any breach of contract on the part of the employee.

The effect of the ruling was that, rather than reading into the agreement a higher repurchase price, the repurchase clause was deemed invalid and the executive was entitled to keep the shares.