Expiration clauses for stock options

In its ruling of 19 March 2025 (Ref.: 10 AZR 67/24), the Federal Labour Court (BAG) changed its case law on expiration clauses for (virtual) share options. This makes it considerably more difficult, if not impossible, to include “bad leaver” clauses in stock option plans. But the BAG has left a loophole. It still allows for the possibility of a gradual expiry of (virtual) stock options that mirrors the accumulation phase. Employers should review their stock option plans in light of this change in case law.

 

“Bad leaver” clauses

Granting stock options is intended to give employees the right to purchase shares in the company after a waiting period. During this period, option rights are often accrued gradually (vested). Exercising options is only permitted within a predefined exercise period.

When virtual stock options are granted, employees don’t receive options on real shares, but rather a payment claim that reflects the value of the virtual shares. The payment claim is usually contingent on both the vesting of options and the occurrence of an “exit” event. In this specific case, an “exit” event means generating proceeds from the value of the company (eg through an initial public offering or sale of the company), in which the option holders participate.

In both variants, it’s common practice to have a provision where the options expire if the employment relationship ends before the options are exercised. Employers often differentiate according to the reason for leaving. If the reason for terminating the employment relationship lies within the sphere of the employer (good leaver cases), only unvested options expire. The “good leaver” retains the vested options and can still exercise them after the termination of the employment relationship. If, on the other hand, the reason for the termination lies within the sphere of the employee (bad leaver cases), all options expire, regardless of whether they’ve already been vested or not.

 

Change in case law

Based on a 2008 decision (10 AZR 351/07), forfeiture clauses were deemed permissible for a long time. At that time, the BAG ruled on genuine stock options that, due to the speculative nature of stock options, employees couldn’t expect guaranteed value from options, even with good performance. For this reason, forfeiture clauses for stock options were considered permissible in a more wide-reaching manner than for other remuneration components.

This position has now been overturned – at least for virtual stock options. A forfeiture clause in (virtual) stock options that provides for virtual option rights accrued in favour of the employee to expire immediately when the employment relationship is terminated due to voluntary resignation unreasonably disadvantages the employee, so is invalid.

Based on the current ruling, it seems doubtful whether expiry clauses that provide for the immediate expiry of accumulated stock option rights for bad leavers are still possible at all, even within very narrow limits. In any case, according to the latest case law, the bad leaver clauses commonly used in practice are now a thing of the past for virtual stock options.

It remains to be seen whether this case law will also be applied by the courts to real stock options. The BAG's reasoning for the inadmissibility also applies to such cases.

 

Gradual expiry

For virtual options, the BAG opens up the possibility to regulate the expiry of accumulated options after terminating employment in the case of (virtual) stock options. The ruling also concerned a provision that provided for the gradual expiry of all accumulated options after termination of employment. The BAG considered the specific provision to be invalid because the expiry was to take place twice as fast as the options were accumulated.

However, the BAG emphasised that it was fundamentally in the employer's legitimate interest to provide for such a gradual expiry clause because the employee's influence on the value of the company, in which they are to participate indirectly via the virtual options, decreases over time after leaving the employment relationship. The mere fact that, in this specific case, the options expired faster than they were accumulated led the BAG to consider the provision invalid. However, the BAG indicated that a provision providing for expiry mirroring accumulation could be valid.

Here, too, it remains to be seen whether this ruling will be applied to real stock options.

 

Open questions

It hasn’t been decided whether these rules also apply if the options are granted by another group company rather than the employer. We assume that the case law will decide this question according to the same principles that are applied to the question of works council co-determination under section 87(1) no. 10 of the Works Constitution Act (BetrVG). It will depend on whether the options are attributable to the contractual employer. This depends on a variety of factual details. These include, for example, the reference to the options in the employment contract or in the total compensation statement and the employer's involvement in the decision to grant them.

Stock options are often granted to managing directors and members of the executive board. Disputes with members of executive bodies are heard before the civil courts not labour courts. Members of executive bodies are also considered consumers in civil courts, meaning that a review of general terms and conditions must generally take place. But civil courts are less strict when assessing contractual clause as an unreasonable disadvantage. So it’s quite likely that the civil courts will accept a forfeiture clause.

Please also read the commentary by Dr. Hans-Peter Löw in Betriebs-Berater. (German language)