In recent years and under prevailing conditions on the Swedish stock market, many companies have initiated discussions on adjusting the terms and conditions of various types of option programmes to restore an effective incentive for the participating employees. These discussions involve adjusted strike or subscription prices, extended exercise or subscription periods or other, less comprehensive, adjustments of a purely technical or editorial nature. This will, of course, give rise to a number of considerations.
The tax treatment of adjusting the terms and conditions of a running option programme is not clear in Sweden. This issue is of immediate interest for different employee option programmes. There have recently been a number of tax rulings linked to this issue. But the outcome of these rulings is not clear-cut. Instead, there have been different outcomes depending on what terms and conditions actually are adjusted and what kind of options are in question.
In Sweden there is a clear distinction between options that qualify as securities for tax purposes and employee stock options that do not. Options that qualify as securities - generally warrants and call options with terms and conditions that are in line with conditions on a market - are treated for tax purposes as shares and other securities. Any benefit arising from such an award of options is also taxed as salary income at the time of the grant.
According to a tax ruling - which at present is under trial by the Swedish Administrative Supreme Court - an adjusted strike or exercise price and/or an extended term of the option is not accepted for tax purposes. Instead, this is taxed as an exchange of options, that is, a taxable sale of the existing option for a consideration corresponding to the value of the new (adjusted) option. Any difference in value is taxed as a salary benefit.
The other type of option - employee stock options (sw. personaloptioner) that do not qualify as securities - is regarded for tax purposes as a promise or right to receive or purchase securities in the future on favourable terms and conditions. Where the right itself does not qualify as a security. Such employee stock options are not taxed at all at the time of grant. Instead, the tax liability occurs at the time of exercise or - in cases where the options are sold or otherwise disposed of - at sale or disposal. Therefore, there is, in the case of these types of options, a wider scale of adjustments or revisions that can be tolerated without causing taxation. The reasoning in this case is that such options do not really represent an unconditional right to acquire shares or other securities until the options "vest" (when the options no longer lapse due to termination of employment). In recent tax rulings from the Swedish Council For Advance Tax Rulings, the Council has found that adjustments of the terms and conditions can be made even after vesting without any tax consequences as long as the options keep their status as employee stock options. Some of these rulings are under appeal and it cannot be ruled out that the Swedish Administrative Court will rule differently.
Whether or not it will be established in the future that it may be possible to adjust employee option programmes without tax consequences, any adjustment of the terms and conditions of such programmes must also be in line with relevant Swedish securities law regulations and principles. As outlined below, restrictions to adjust the terms of the programmes will not really be found in the field of taxes, but instead in the area of securities laws.
A matter that has been debated in the Swedish market lately is how resolutions on the implementation of option programmes should be passed. By way of guidelines, issued in March 2001, certain big Swedish institutions have expressed their view that every incentive programme "of importance" for the company's shareholders must be decided by a general meeting of shareholders. However, under current company and securities laws, the company's board of directors is authorized to decide on the implementation of certain option programmes. Such option programmes are, mainly, programmes based on synthetic options, employee stock options and call options. On the other hand, where delivery of shares obtained through the exercise of options will be made directly from the company or where the programme is to be secured (hedged) by an issue of shares or share-related instruments, there is a legal requirement that a resolution to this effect be passed at a general meeting of shareholders. In any case, if amendments or adjustments could be made from a securities law perspective, it is likely that such measures at present should be based on shareholder approval taking into account the required super-majority vote.
Where the company is a so-called stock market company (sw. aktiemarknadsbolag), that is, the company's shares are listed on a stock exchange or authorized marketplace in Sweden, not only Swedish tax law but also relevant securities law regulations and principles should be observed. One such fundamental Swedish principle, which was established already at the end of the 1980s and that still applies, is that it is inconsistent with good market practice on the Swedish stock market to amend or adjust the terms and conditions of option programmes that have already been implemented, at least where such measure is more substantial than purely technical or editorial. This restrictive view is, in principle, based on a predictability requirement; after the company has informed the market about terms and conditions of an option programme (by way of a press release, a quarterly report and/or information in the annual report), the market must be able to rely on the option programme remaining unchanged in the future. In this context, it is irrelevant whether the options qualify as securities or if they are so-called employee stock options as distinguished in Swedish tax law and whether the resolution to implement the option programme was based on a decision by the company's board of directors or by a general meeting of shareholders.
Where the company's shares are not listed on a stock exchange or an authorized marketplace in Sweden, these securities law considerations need not be observed, and it is therefore possible, and also permitted, to amend or to adjust the terms and conditions of option programmes already implemented. The resolution on the amendment or adjustment, if passed by the shareholders at a general meeting, should be adopted by a corresponding majority as the one that was applied on the issue of the options
Even if it would be acceptable that certain more or less comprehensive amendments or adjustments of the terms and conditions of a running option programme can be made without triggering taxation per se, at least for employee stock options that do not qualify as securities, there are still strong impediments to so-called stock market companies making more comprehensive amendments or adjustments of an outstanding and running option programme, even if the current share price is far below the exercise or subscription price according to the option programme. In this context, it is irrelevant if the options were issued based on shareholder approval or on a resolution by the board of directors. Therefore, Swedish stock market companies have in recent years implemented new option programmes to replace or run in parallel with earlier programmes, instead of adjusting the terms and conditions of earlier arrangement.
Anne Rutberg, Klaes Edhall
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