German Federal Labour Court: Expiry of virtual option rights after termination of the employment relationship

According to previous jurisdiction of the Federal Labour Court, the immediate expiry of already “vested” option rights under an Employee Stock Option Program (“ESOP”), which could not yet be exercised during the employment relationship, was generally considered permissible after termination of the employment relationship through resignation. With its verdict from 19 March 2025 – case no. 10 AZR 67/24 – the Federal Labour Court revises its previous legal conception.

Summary of the case

The current decision was based on the following case:

The employment relationship, established between the parties in 2018, ended when the plaintiff gave notice of termination on 31 August 2020. In 2019, the plaintiff received an offer for the allocation of 23 virtual option rights from the defendant employer in the form of an allowance letter, which he accepted by means of a separate declaration.

According to the regulations for employee stock options (“ESOP”), the exercise of virtual options, which can lead to a claim for payment against the defendant, requires their exercisability after the expiry of a vesting period and a so-called exercise event such as an initial public offering (IPO). As part of this, the virtual option rights allocated to the employee can be exercised in stages after a waiting period of at least twelve months within a vesting period of four years in total. In accordance with No. 4.2 ESOP, virtual option rights that have already been exercised, i.e. “vested” but not yet exercised, expire, among other things, if the employment relationship is terminated by the employee. Furthermore No. 4.5 ESOP requires that “vested” but not yet exercised virtual options also expire successively within a period of two years after termination of the employment relationship. The latter clause therefore includes an acceleration of expiry. In the present case, 31.25 % of the option rights allocated to the plaintiff were “vested” at the time he left the company.

Judgment

The Federal Labour Court now had to decide on the validity of these expiry clauses and ruled, contrary to its previous case law, that the expiry clause linked to the termination of the employment relationship was invalid and therefore did not stand up to a content review in accordance with Section 307 para. 1 sentence 1 and para. 2 no. 1 BGB (German Civil Code). In its reasoning, the Federal Labour Court states that the immediate expiry of “vested” option rights after termination of the employment relationship does not take appropriate account of the employee’s interests and is not compatible with the legal concept of Section 611a para. 2 BGB. Furthermore, there was a disproportionate aggravation of termination, as the employee was not allowed to terminate the employment relationship before an uncertain exercise event in order to avoid a possible loss of assets. The same applies to clauses that stipulate that “vested” virtual option rights after termination of the employment relationship twice as quickly as they have accrued within the so-called vesting period. According to the Court this acceleration of the expiry also puts the employee at an unreasonable disadvantage when viewed in a standardized manner. Based on the vesting period of four years stipulated in the present case and the minimum waiting period of twelve months, such a clause allows the virtual options granted to the employee to expire twice as quickly as they were “vested”.

Following this changed opinion of the Federal Labour Court, the expiry clauses in question are therefore invalid and the expiry of “vested” options after termination of the employment relationship is therefore excluded.

Practical relevance

The judgement is of key importance for companies that grant employee profit-sharing schemes.

The majority of existing virtual option and participation programs contain expiry clauses based on the previous case law of the Federal Labor Court (BAG 28 May 2008 – case no. 10 AZR 351/07). Accordingly, these clauses now need to be reviewed and adapted to the amended case law of the Federal Labour Court