German Federal Labor Court Finds Certain Virtual Stock Option Forfeiture Clauses May Unreasonably Disadvantage Employees

Quick Hits

• The German Federal Labor Court ruled on March 19, 2025, that certain forfeiture clauses in General Terms and Conditions of Business regarding the expiration of virtual stock options upon termination of employment are invalid.
• The court found that such forfeiture clauses unreasonably disadvantage employees by not adequately considering the work already performed and the associated entitlement to the options.
• International companies might benefit from decoupling employee ownership at least from the German employment relationship to avoid legal uncertainties and enhance the attractiveness of their programs.

Background

Virtual stock options are a popular form of employee ownership. They allow employees to participate in the economic success of the company without actually purchasing shares. These options are often subject to certain conditions, such as length of service. Employees often acquire rights to virtual options in different tranches. This staggered acquisition of rights is called vesting. In addition, the exercise of vested rights is often dependent on an event beyond the employee’s control, such as an initial public offering (IPO) of the company. This often results in a situation where the value of virtual stock options can only be realized after a significant delay.

Many programs contain clauses that provide for the forfeiture of vested options when the employee leaves the company. The German Federal Labor Court has now ruled that such forfeiture clauses can be invalid if they unreasonably disadvantage the employee.

Case History

In the present case, the plaintiff was employed by the defendant from April 1, 2018, to August 31, 2020. The employment relationship was terminated by a timely voluntary resignation. In 2019, the plaintiff received and accepted an offer to be granted twenty-three virtual stock options. According to the employee stock option plan (ESOP), the exercise of the options required their exercisability after the expiration of a vesting period and an exercise event such as an IPO. The options could generally be exercised in stages after a minimum waiting period of twelve months within a total vesting period of four years.

At the time of the plaintiff’s resignation, 31.25 percent of the options granted to the plaintiff were vested.

The defendant rejected the plaintiff’s claim to these options based on the forfeiture clauses. The plaintiff argued that the forfeiture clauses were invalid because the options were an integral part of his compensation package.

The German Federal Labor Court’s Ruling

The Tenth Senate of the German Federal Labor Court ruled in favor of the plaintiff and found the following: the vested virtual stock options had not expired; the forfeiture clauses in the ESOP unreasonably disadvantaged the employee and were therefore invalid; the vested options constituted compensation for the work performed by the plaintiff; and the immediate forfeiture upon termination of employment did not adequately take into account the employee’s interests and was contrary to the legal concept of Section 611a (2) of the German Civil Code (BGB). In addition, the court found that the termination of the vested virtual stock options could be seen as an unjustified restriction to end the employment and seek a new job.

Issue of Restricted Exercisability Upon Voluntary Resignation

A key issue highlighted by the BAG in its decision is the restricted exercisability of options in the event of voluntary termination by the employee. These clauses unreasonably disadvantage the employee because they do not sufficiently consider the work already performed and the associated entitlement to the options. The immediate or accelerated forfeiture of already vested options upon voluntary resignation constitutes an unfair disadvantage and may act as a disincentive to resign, as employees may refrain from resigning in order to avoid financial losses.

In particular, international companies could consider decoupling employee ownership from the employment relationship and structuring it according to a different legal regime. This can help avoid legal uncertainty and make the programs more flexible and attractive to employees.

Ogletree Deakins’ Berlin and Munich offices will continue to monitor developments and will provide updates on the Cross-Border and Employee Benefits and Executive Compensation blogs as additional information becomes available.

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