Validity of Call Options for Leaver Events in German Management Equity Programs

Reaffirmation of Established Case Law

The German Federal Court of Justice (BGH) on February 10, 2026, reaffirmed its established case law (in particular, its rulings from 2005 and 2007) concerning provisions in partnership agreements and articles of association granting a partner or shareholder, a group of partners or shareholders, or the majority of partners or shareholders the right to expel a co-partner or co-shareholder from the company or partnership without objective grounds (unrestricted expulsion clauses). The court held that these clauses are generally void pursuant to Section 138(1) of the German Civil Code (BGB) unless they are exceptionally justified by special circumstances. In this regard, a comprehensive assessment of all circumstances and the interests of the parties in the respective case are decisive.

An expulsion clause is objectively justified if a managing director is granted the status of a limited partner by virtue of his position as managing director and for a purpose associated with that position – which ceases upon the termination of his organizational or employment contract or activity, and his partnership interest as a partner, in view of its structure, is otherwise not to be attributed any relevant independent significance vis-à-vis the position as managing director. This does not necessarily require that the managing director assumes no or only a minimal economic risk with its interest.

The Underlying Case

In the underlying case, the plaintiff was appointed as the sole external managing director (MD) of a German limited liability company (OpCo) with a managing director service agreement. OpCo was backed by private equity sponsors that established a management equity program and offered the MD and other managers to participate (indirectly) in OpCo as limited partners of a German limited partnership (KG) acting as pooling vehicle. KG owned in aggregate 873 ordinary shares in OpCo corresponding to 1.28% of OpCo’s issued and outstanding share capital.

The MD, along with other managers, joined KG as a limited partner in exchange for a contribution of EUR 149,984, thereby indirectly subscribing for 262 of the 873 ordinary shares held by KG. The amount of his contribution corresponded to the fair market value of the ordinary shares allocated to the MD. The shares held in OpCo entitled the MD to a corresponding portion of the exit proceeds upon a sale of OpCo but not to any dividends or current profits of OpCo prior to the exit.

The limited partnership agreement (Partnership Agreement) of KG to which the MD became a party contained a call option entitling certain other limited partners to (re)acquire a manager’s interest in KG in the event of the manager’s departure from the group. The call option was implemented through an irrevocable offer made by the managers to the other limited partners to sell and assign their limited partnership interest, and the other limited partners’ obligation to accept this offer only if an agreed “call event” as defined in the Partnership Agreement occurs. A call event included the event in which “the manager, at any time, regardless of the legal basis, (i) is not a managing director of a member of the group and is not in an active employment or service relationship (…), or (ii) is irrevocably released from duties by the employer of the group,” whereby the group included OpCo. Pursuant to the Partnership Agreement, the purchase price for the called interest depends on the circumstances of the exercise of the option differentiating between “bad leaver” and “good leaver” events. In case of a bad leaver event, the manager receives the lower of the fair market value and his/her own investment; in case of a good leaver event, the manager receives after a vesting period of four years the full market value, and in case of an earlier departure, only the vested portion at fair market value.

After about two years, the MD was dismissed as managing director of OpCo without stating reasons, and his managing director service agreement was terminated. Shortly thereafter, the call option was exercised and the purchase price, corresponding to the fair market value of the called interest, was determined to be EUR 35,174 and then paid to the MD.

The MD filed a declaratory action seeking a ruling that he remains a limited partner of KG, claiming that the call option under the Partnership Agreement is void as it constitutes an arbitrary termination clause contrary to public policy under Section 138(1) of the German Civil Code (BGB). At the Regional Court, the case brought by the MD was successful, and the subsequent appeal of the PE sponsor before the Munich Higher Regional Court (OLG) was rejected. The appeal of the PE sponsor to the German Federal Court of Justice (BGH) in which the PE sponsor continued to seek dismissal of the claim was successful and led to the reversal of the appellate judgment and the remand of the case to the Munich Higher Regional Court for the reasons stated above.

Confirmation of Typical PE Structures

In its ruling, the German Federal Court of Justice explicitly acknowledged the company’s legitimate interest in retaining managers by aligning interests and increasing motivation as the central objectives of a management participation program. For this reason, it is obvious that the rationale justifying the equity participation – loyalty to the company, increased motivation and reward for successful performance – no longer applies if the manager’s term of office or employment relationship ends. Furthermore, only by retransferring the equity is the company given the opportunity to grant the manager’s successor the same equity participation and thus to continue the business model in the long term.

Contrary to the assumption of the appellate court, the incentive and retention function of management equity participation programs should not be given less weight simply because the managers were not to participate in the company’s current/annual profits, but rather (as is typical in private equity models) only in the proceeds from a subsequent sale of the company. However, the incentive and reward function of an equity stake (only) in the proceeds from a sale of the company is comparable to a bonus payment in the event of a successful business transaction. This is explained and justified, particularly in private equity business models, by the objective of the majority shareholder that is known to the manager at the time the MEP contract is concluded. From the outset, the business model is not aimed at a sustained increase in the company’s current profits, but rather at increasing the company’s value to achieve the highest possible sale proceeds in an exit.

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