In its ruling dated March 19, 2025, the German Federal Labor Court (BAG)—in contrast to the two previous instances and contrary to its previous case law—deemed an expiry clause in general terms and conditions to be unreasonably disadvantageous to the employee in accordance with Section 307 (1) sentence 1, (2) no. 1 of the German Civil Code (BGB) and therefore invalid, which stipulates that "vested" virtual stock option rights expire immediately after termination of the employment due to a termination by the employee. The same applies to a clause that stipulates that the "vested" virtual stock option rights expire after termination of the employment twice as quickly as they have accrued within the so-called vesting period.
The plaintiff was employed by the defendant from April 1, 2018 to August 31, 2020. His employment ended due to ordinary termination of the employee. In 2019, the plaintiff accepted an offer for the allocation of virtual option rights. According to the Employee Stock Options Program (ESOP), the exercise of virtual options requires that they can be exercised after a vesting period as well as an exercise event such as an initial program offering (IPO). According to the ESOP, the virtual options allocated to the employee become exercisable in portions after a minimum waiting period of 12 months within a vesting period of four years in total. The vesting period is suspended if and as long as the employee is released from their obligation to work without salary entitlement. According to No. 4.2 ESOP, virtual options that can already be exercised, i.e. "vested" but have not yet been exercised, expire if, among other things, the employment ends due to the employee's own resignation. In addition, "vested" but not yet exercised virtual options expire successively within a period of two years after the end of the employment in accordance with no. 4.5 ESOP.
At the time the plaintiff left the company, 31.25% of the option rights allocated to him were "vested." The plaintiff asserted a claim to these virtual options. He argued, among other things, that he had earned the exercisability of the options by performing work during the vesting period.
The defendant rejected the claim with reference to the expiry of the option rights in accordance with the ESOP. It took the view that the virtual option rights were a reward for loyalty to the company until an exercise event occurred. It was merely an opportunity to earn money, so that no earned salary would be withdrawn in the event of expiry.
The lower courts had dismissed the action brought by the plaintiff.
The BAG ruled in favor of the plaintiff. In the opinion of the BAG, the plaintiff's "vested" virtual options had not expired. The BAG found that the ESOP provisions are general terms and conditions (GTC) and that the expiry clauses, which are linked to the termination of the employment, do not comply with Section 307 (1) sentence 1 German Civil Code (BGB).
The BAG followed the plaintiff's argument that the "vested" virtual options that are exercisable through the partial expiry of the vesting period also constitutes compensation for the work performed during this period in the active employment. The BAG derived this in particular from the provision on the suspension of the vesting period in times in which the employee does not acquire any entitlement to remuneration. According to the BAG, the immediate expiry of "vested" share options after a termination of the employment by the employee does not adequately take into account the interests of the employee who has already performed the work and is contrary to the legal concept of Section 611a (2) BGB. In addition, the BAG considered this provision to be a disproportionate hurdle to give notice of termination, as the employee would be prevented from terminating the employment prior to an uncertain exercise event in order to avoid a possible loss of assets.
The BAG also considers clause no. 4.5 ESOP to be invalid according to which virtual options expire within two years and thus twice as quickly as the duration of the vesting period. According to the BAG, this does not sufficiently take into account the duration of the work performed during the vesting period to obtain the exercisable option rights.
According to the press release on the decision of March 19, 2025, the BAG expressly departs from its previous case law on the lawfulness of expiry clauses in relation to stock options (see BAG, decision of May 28, 2008, 10 AZR 351/07).
Previously, the BAG had deemed the immediate forfeiture of already "vested" options which could not yet be exercised during the employment to be lawful after termination of the employment. In its ruling of May 28, 2008, the 10th Senate had decided that the principles developed for special remuneration such as bonuses could not be applied without restriction in the case of stock options. In 2008, the BAG argued that, in contrast to special remuneration, stock options have a much more speculative character. They represented less of a consideration for work services rendered, but rather a “chance of profit” and an incentive for future commitment. The employee could not rely on the intrinsic value of the options and was therefore not in the same way worthy of protection as in case of special remuneration. Therefore, an “employment without notice” as a prerequisite for exercising the stock option rights is more acceptable for the employee than in the case of special remuneration which has no or less speculative character. At the time, the BAG concluded that a provision was permissible which provided for full expiry of all option rights in the event of termination of the employment before the end of the waiting period; this even applied irrespective of the reason for termination.
According to the press release, the previous view which supported the employer's interests is no longer upheld. Rather, the BAG now appears to be applying the principle that remuneration that has already been "earned" may no longer be withdrawn to (virtual) options as well.
The BAG decision of March 19, 2025 will presumably have considerable impact for companies that have employee participation programs.
Such programs usually contain expiry clauses that were designed with the previous, now amended case law in mind. As in the case now decided by the BAG, an ordinary termination of employment given by the employee is classified by some employee participation programs as so-called "bad leaver" case and leads to an expiry of the options that cannot yet be exercised upon termination of employment; in some cases, this also applies to the exercisable options upon termination of the employment. There is thus likely a need for adjustment in many employee participation programs.
However, many questions remain unanswered at present, such as: Which cases are covered by the change in case law in detail? Would a melt-down period, a so-called "de-vesting," be considered lawful if the term of the “de-vesting” period corresponds to the vesting period? The reasons for the ruling of March 19, 2025 will hopefully provide more clarity on how employee participation programs can reasonably be adapted from an employer's perspective.
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