What was the dispute?
An external managing director of a limited liability company (GmbH) worked on the basis of a managing director employment contract and joined a limited partnership as a limited partner as part of a management participation programme by making a contribution of around EUR 150,000. His investment was not designed to generate ongoing profits, but solely to participate in the proceeds of a future sale of the company.
After some time, the managing director was dismissed without giving reasons, his employment contract was terminated with notice and he was irrevocably released from his duties. The remaining shareholders then exercised a call option agreed in the partnership agreement. They paid the manager a compensation of only around EUR 35,000, based on the market value, which was significantly less than his original investment. The manager fought back, arguing that he was still a shareholder because the call option was void as an invalid and unenforceable termination clause expelling him from the company without cause.
What are “expelling clauses” – and why are they problematic?
A, “expelling clause” is intended to enable co-shareholders to exclude another shareholder from a company without objective grounds. The German Federal Court of Justice (BGH) considers such clauses to be fundamentally inadmissible “swords of Damocles”: the shareholder concerned is under constant pressure because he must fear being forced out of the company at any time. As a result, he may no longer base his behaviour on the good of the company, but on the will of those entitled to exclude him.
According to established case law of the German Federal Court of Justice, such clauses are therefore fundamentally contrary to generally accepted principles of morality and are void under Section 138 of the German Civil Code (BGB). However, there are exceptions.
The German Federal Court of Justice’s decision: When is the clause effective in exceptional cases?
The German Federal Court of Justice overruled the previous ruling of the Munich Higher Regional Court and clarified that the decisive factor is an overall assessment of all the circumstances of the individual case. Firstly, it is decisive whether the shareholder status was granted to the manager because of his position as managing director and for a related purpose that ceases to apply when his employment ends. Secondly, it must be determined whether his shareholding has no independent significance apart from his position as managing director.
In the specific case, the German Federal Court of Justice considered three key aspects:
- Incentive and retention function: The shareholding served to retain the manager in the company and to increase his motivation. This purpose naturally ceases to apply when the employment relationship ends.
- Exit proceeds participation is not an obstacle: The fact that managers were not to participate in current profits, but only in exit proceeds, is typical of private equity models and does not diminish the objective justification of the clause.
- Economic risk alone is not sufficient: The objective justification of a termination clause does not necessarily require that the manager assume no or only a low economic risk. The entrepreneurial risk assumed by the manager, including through the initial investment, is not sufficient on its own to give his participation independent weight in conceptual terms.
What does this mean in practice?
The ruling provides greater clarity for the design of management participation programmes. Private equity investors and companies may agree call options and expelling termination clauses in articles of association – provided that the participation is closely linked to the manager’s activities and does not take on an independent investment character. Risks of abuse, such as the deliberate ousting of managers shortly before a lucrative exit, can be countered by challenging the exercising of such rights in the individual case on the regulations of good faith etc. in accordance with Section 162 (2) or Section 242 of the German Civil Code (BGB). The alignment of the termination clauses with the compensation clauses is also important.
With regard to a virtual employee participation programme (VESOP), the German Federal Labour Court (BAG) ruled in favour of employees last year (judgment of 19 March 2025, Ref. 10 AZR 67/24) that an expiry clause in the VESOP terms, which was not unusual at the time, is invalid if it stipulates that virtual option rights “vested” in favour of the employee immediately expire upon termination of the employment relationship due to voluntary resignation. According to the BAG, the same applies to a clause stipulating that the “vested” virtual option rights expire twice as quickly after termination of the employment relationship as they accrued during the so-called vesting period.
Recommended action
Anyone who designs management participation programmes or participates in such a programme as a manager should have the contractual provisions carefully reviewed. The exact structure of the participation, in particular the incentive function, economic risk and rights of influence, determines the effectiveness or invalidity of the clause.
The most important points in brief:
- “Expelling clauses” that force a shareholder out of the company without objective reason are generally Invalid and unenforcable – unless they can be objectively justified in exceptional cases.
- Objective justification may be considered if the shareholding is closely linked to the manager’s activities and loses its purpose when those activities end.
- Even pure exit proceeds participations, as are common in the private equity sector, do not preclude the objective justification of a termination clause.
