BAG overturns forfeiture clause for share options after termination

On March 19, 2025, the German Federal Labour Court (Bundesarbeitsgericht, BAG) ruled on the expiry of virtual option rights after termination of the employment relationship (10 AZR 67/24). The employer had included a clause in the Employee Stock Option Provisions (“ESOP”) according to which virtual option rights that have already become exercisable (“vested”) expire immediately if the employee terminates the employment relationship. 

The BAG declared the provision to be invalid, as option rights are considered an essential component of the remuneration package which cannot subsequently lapse—this would constitute an unreasonable disadvantage to the employee. The same applies to a provision that stipulates that vested virtual option rights expire twice as quickly after termination of the employment relationship as they were previously saved. The decision leads to a change in previous BAG case law and should be considered when designing (virtual) employee participation programs.

Option rights as a popular incentive for employees 

Virtual option rights are based on contractual agreements that place employees in the same position as if they had a direct stake in their employer's company. Although this does not give the employees involved a “real” stake in the company, it does give them the opportunity to participate financially in the company's development. Some employers offer this option as an incentive to attract and retain employees in the long term. If the corresponding option rights may only be exercised after the expiry of a certain period, this is referred to as “vesting”. The option rights granted to the employee can then be exercised in stages over a certain period (“vesting period”).  

In the present case, the plaintiff employee had received an offer for the allocation of such virtual option rights (so-called “Allowance Letter”) during his approx. two years of employment with the employer and accepted this by means of a separate declaration. According to the ESOP provisions, the exercise of the virtual options, which can lead to a payment claim against the defendant, requires their exercisability after the end of the vesting period and a so-called exercise event such as an IPO. The virtual options allocated to the employee can be exercised in stages after a minimum waiting period of twelve months (known as a “cliff”) within a vesting period of four years in total. The vesting period is suspended if and for as long as the employee is released from their obligation to work without salary entitlement.

Employer wrote forfeiture clause into ESOP provisions—court disagrees 

The employment relationship ended in 2020 due to the employee's own termination with due notice. For such cases, the employer had included a clause in the ESOP according to which the option rights that had already become exercisable were to expire following the employee's own termination. 

At the time of the plaintiff employee's resignation, 31.25 percent of the option rights allocated to him had already vested. He claimed these and believed the options in question did not expire upon termination of the employment relationship. The defendant rejected the claim with reference to the expiry of the option rights. The lower courts dismissed the plaintiff's action for a declaratory judgment. However, the Tenth Senate of the Federal Labor Court recently rejected the forfeiture of the option rights. In doing so, the BAG explicitly changed the previous case law (BAG, judgment of May 28, 2008, 10 AZR 351/07).   

BAG: Forfeiture clause unreasonably disadvantages employees 

The court first determined that the ESOP are general terms and conditions within the meaning of Section 305 (1) sentence 1 BGB (German Civil Code), which are subject to content review. If an expiry clause stipulates that virtual option rights already vested in favor of the employee expire immediately after termination of the employment relationship due to the employee's own termination, this puts the employee at an unreasonable disadvantage (Section 307 (1) sentence 1, (2) no. 1 BGB). The clause therefore does not stand up to a content review. 

The reason for this is that the option rights already “vested” due to the partial expiry of the vesting period are a consideration for the work performed by the employee during this period. According to the BAG, the forfeiture of option rights that have already been “earned” does not consider the interests of the employee, as the employee should not terminate the employment relationship to prevent a loss of assets. This constitutes a disproportionate aggravation of the termination.   

A clause that stipulates that the exercisable virtual option rights expire after termination of the employment relationship twice as quickly as they were progressively accrued or saved and earned within the “vesting period” is also invalid according to the Tenth Senate. This does not consider the time that the employee has spent performing their work, without any special interests of the employer justifying the shorter expiry period.

Far-reaching consequences for employee participation programs 

By changing its case law, the BAG is now strengthening the rights of employees in the context of (virtual) participation models. In the future, employers must structure their (virtual) participation programs fairly and take greater account of the remuneration character of option rights that have already become exercisable. 

The expiry of “vested” option rights should no longer be linked to the employee's own termination. As the reasons for the ruling have not yet been published, it remains to be seen how the decision will affect other structuring mechanisms in practice. In practice, however, the decision will have far-reaching consequences for the design of employee participation programs. 

Employers should review existing (virtual) option plans and, if necessary, adapt them considering the new case law in order to prevent future legal disputes. We will be happy to provide you with expert advice and support you in the practical implementation of the necessary changes.

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