Germany: Successive Expiry of Vested Virtual Stock Options After Termination of Employment

Making virtual options granted to an employee that have already vested subject to successive expiry after termination of employment does not disadvantage the employee to an unreasonable degree.

Background

The case before the Higher Labour Court of Munich revolved around “Employee Stock Option Provisions” aimed at providing an incentive for employees to continue to contribute to the company’s success. According to the vesting program stipulated in these provisions, within four years of the allocation of virtual options to employees, every year 25% of the options would vest, i.e. could be exercised. At the same time, every three months after the legal end of an employment, 12.5% of the vested but unexercised options would lapse, meaning, after two years, all vested options would have lapsed.

An employee who had received such options left the company in 2020 while holding 31.25% of vested but unexercised options under the vesting program. Wishing to exercise his options two years later, he argued that the provision on expiry was invalid as it would mean that earned remuneration would be withdrawn.

Key Issues

The Higher Labour Court found that the successive expiry of vested options within two years after the termination of the employment was valid. In particular, the court saw no unreasonable disadvantage to the employee as it found that no earned remuneration was withdrawn.

The vested options, although technically being part of the contractual remuneration, were found to be merely an incentive, a “chance to win” for the future. Because of this speculative nature, the options cannot be seen as something earned in return for work. Rather, what is being withdrawn is a benefit, an opportunity to “earn” more on top of the basic remuneration.

Since the purpose of the options is to motivate employees to stay with the company, this also justifies strict expiry provisions.

Practical Point

• Remuneration granted in exchange for work performed (e.g. a performance-based bonus) cannot be validly withdrawn under German law once earned. Therefore, the decisive question was whether virtual stock options granted to an employee in the context of the employment relationship constitute remuneration in that sense or not. The Higher Labour Court of Munich denied this but considered the case to have general relevance. Due to this, the Federal Labour Court will rule on the case, but the ruling is still pending.