Lapse of Virtual Stock Options in the Event of Voluntary Resignation – Good Leaver or Bad Leaver?

On March 19, 2025, the German Federal Labor Court (Bundesarbeitsgericht) ("FLC") ruled that a provision in an employee stock option plan providing for the immediate forfeiture of vested virtual stock options in the event of voluntary resignation is invalid (10 AZR 67/24).

Contrary to the lower courts, the FLC held that the forfeiture provision was invalid because it unfairly disadvantaged the employee. Vested options are (also) compensation for work performed and not merely a reward for loyalty to the company.

The court also invalidated a clause that provided that vested virtual stock options lapsed twice as fast after termination of employment as they accrued during the vesting period.

Old Case Law: Options are a Chance to Earn Money with a Speculative Character

The FLC thus explicitly overturns its precedent from 2008 (May 28, 2008 – 10 AZR 351/07). At that time, the court had assumed that such a forfeiture clause did not deprive the employee of compensation already earned, but only of a speculative chance of earning it. The favored employees could therefore not rely on the recoverability of the options and were therefore less worthy of protection.

Options are Compensation and Not a Reward for Loyalty

In this case, a company's virtual stock option plan ("VSOP") provided that vested options would be forfeited immediately upon an employee's resignation. For other terminations, they were to be forfeited at twice the vesting rate. The company claimed that the virtual options rewarded the loyalty of the employees in question and were merely an opportunity to earn money.

The FLC disagreed. The options granted are a reward for work done and part of the compensation.

Unduly Disadvantage due to more Difficult Termination

The provisions of the VSOP are subject to special judicial review as general terms and conditions. They must not disproportionately disadvantage employees. The FLC ruled that the immediate forfeiture of the options does not sufficiently take into account the interests of the employees and constitutes a disproportionate obstacle to termination.

Employees may feel compelled not to resign in order to avoid financial loss. Since the vested options are part of the compensation, the forfeiture rule contradicts the legal concept of Sec. 611a para. 2 of the German Civil Code (Bürgerliches Gesetzbuch), which requires the employer to pay the agreed compensation.

The clause providing for accelerated forfeiture of the options in the event of termination (so-called divesting) was also deemed unreasonable and invalid because it did not take into account the work performed during the vesting period.

To-Dos for Employers

The decision is currently available only as a press release. Whether the FLC will generally find any sort of forfeiture clauses to be inadmissible and establishes new principles for all forms of deferred compensation – shares, stock options, virtual options, etc. – regardless of the type of termination, will not be known until the reasons for the decision are made public.

It remains unclear whether the court's new reasoning applies only when the company granting the option is also the employer, as in the case decided. The reasoning in the press release is not easily applicable to group structures where there is no employment relationship between the granting company and the employee, for example where the parent company grants the virtual shares. In such cases, the VSOP rules are often not subject to German law, so that the applicability of German law on general terms and conditions is questionable.

The decision also does not address whether forfeiture provisions for unvested options are permissible.

To the extent that forfeiture clauses and devesting provisions adequately address the interests of departing employees, they will continue to be permissible and effective. According to the press release, the timing of vesting and forfeiture must also be considered.

Companies should review their VSOPs and similar deferred compensation arrangements in light of the decision and adjust programs as necessary. This will not be possible until the reasons for the decision are available in writing. Companies should also consider options where the granting company is not the employer, as there is likely to be more leeway.

With respect to former employees, companies should also consider whether contractual limitation periods cover any VSOP claims.