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...

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