Newsflash: Virtual option rights – expiry clauses under scrutiny

Bad news from Erfurt for companies with employee stock option programmes. The Federal Labour Court (Bundesarbeitsgericht, BAG) has abandoned its previous case law that the principles for examining general terms and conditions developed for special payments cannot be applied without restriction to stock options due to their speculative nature. According to this latest decision by the BAG, expiry clauses that allow already vested (i. e. exercisable) virtual options to expire immediately or disproportionately quickly after an employee’s resignation are unreasonably disadvantageous for the employee and therefore invalid. Numerous so-called bad leaver and good leaver clauses in employee stock option programmes are going to require an overhaul at the very least.

The defendant company had offered the employee the opportunity to participate in a so-called virtual stock option programme that was modelled on a participation in the company's equity. As an incentive for the future, the virtual options were not exercisable immediately upon allocation, but were to be "vested", i.e. exercisable over a certain period of time. The underlying option conditions stipulated, among other things, that the exercisable virtual options would expire with the termination of the employment relationship through the employee’s resignation. Also in other cases where the employment relationship came to an end, the options already vested by the employee were to expire successively within a period of two years after the end of the employment relationship, despite the fact that the vesting period, i.e. the period for accumulating the options, was four years.

The employment relationship with the plaintiff ended through his own resignation before any exercise of the already vested option conditions. The plaintiff sought a declaration to the effect that the options granted to him had not expired as a result of the employment relationship ending. The BAG ruled in the plaintiff’s favour, thereby changing its previous case law (judgement of 28 May 2008 - 10 AZR 351/07).

The BAG is thus following the previously critical voices in the labour law literature and evidently no longer bases its reasoning on the speculative nature of the earning opportunity of virtual stock option programmes ("VSOP"). Rather, it will also be applying the strict general terms and conditions principles for success or performance-related special payments to virtual options in future.

The change in the BAG's case law is controversial in that it evidently not only covers so-called bad leaver clauses (in which all options that can already be exercised expire immediately in a bad leaver case), but also obviously restricts so-called good leaver clauses much more. The BAG's press release dated 19 March 2025, for example, states that a successive expiry of options after an employee has left the company also unreasonably disadvantages the employee if the expiry period (in this case at least two years) does not sufficiently take into account the duration of time spent by the employee in the vesting period for the exercisable option rights (in this case four years). The various durations of the vesting periods, any minimum waiting period and the expiry period therefore have to be in reasonable proportion to each other. It is not clear from the BAG's press release when an unreasonable disadvantage can be assumed. The reasons for the decision are therefore eagerly anticipated.

The BAG's judgement will have a significant impact on the design of existing and new VSOPs and ESOPs. Typical bad and good leaver clauses will also need to be reviewed.

We will provide you with an update as soon as we have the reasons for the judgement.

Back to list