Federal Court of Justice (BGH) Decision of February 10, 2026 - II ZR 71/24
In the context of private equity structures and venture capital transactions, call options in good-leaver and bad-leaver scenarios are a regular component of management equity participation programs. These equity participation programs are designed to closely align management’s interests with the portfolio company’s performance through equity upside, while leaver call options ensure that investors retain control over the shareholder base. This raises the question of to what extent unrestricted termination clauses are permissible under corporate law and where the line is drawn regarding unconscionability under Section 138(1) of the German Civil Code (BGB).
In its ruling of February 10, 2026, the Federal Court of Justice provided a clarification that is central to transactional practice. The Federal Court of Justice upholds the principle that termination without cause is generally contrary to public policy, but at the same time leaves room for management models that are objectively justified.
Facts of the Case
The case at issue concerns a typical private equity management program. Through a GmbH & Co. KG, managers hold an indirect stake in the holding GmbH. The plaintiff, the managing director of a portfolio company, becomes a limited partner and pays the fair market value of approximately €150,000 for his interest. He does not participate in the current profits, but only in the proceeds from a future exit via the interest held by the GmbH & Co. KG. In practice, these investment vehicles are often referred to as “MEP companies.”
The partnership agreement of the GmbH & Co. KG provided for a call option: If the plaintiff’s position as an executive or employee ceases (e.g., due to dismissal, termination, or release from duties), the investors may repurchase the plaintiff’s limited partnership interest. The purchase price provision is tied to a “good/bad leaver” system and a four-year vesting period. After the plaintiff was removed as managing director and placed on leave, the defendants exercised the option and paid a severance payment equal to the fair market value of just under €35,000.
The plaintiff challenged the call option as an unconscionable termination without cause (Section 138(1) of the German Civil Code (BGB)) and filed a lawsuit seeking a declaration that his status as a limited partner remained in effect. The Augsburg Regional Court (first instance) and the Munich Higher Regional Court ruled in favor of the plaintiff and the manager, respectively. However, the Federal Court of Justice (BGH) overturned the decisions and remanded the case to the lower court.
Unconscionability of Unrestricted Termination Clauses
The Federal Court of Justice (BGH) reaffirmed its established case law. Provisions in partnership agreements that grant a partner or a majority the right to expel a co-partner without objective grounds are, in principle, void in partnerships and limited liability companies (GmbH) pursuant to Section 138(1) of the German Civil Code (BGB). The possibility of expulsion at any time creates considerable psychological pressure and impairs the free exercise of membership rights. The Senate expressly rejected models that rely solely on subsequent review of the exercise of such rights under Section 242 of the German Civil Code (BGB). Precisely because the mere threat of expulsion typically leads to self-restraint, preventive protection under Section 138 of the German Civil Code (BGB) is necessary.
However, a termination clause may be objectively justified if the equity interest is granted to the managing director by virtue of his position, is clearly intended as an incentive, and the status as a shareholder does not take on independent significance apart from his position as a member of the executive body.
Application in a Specific Case
Although the Federal Court of Justice (BGH) classified the call option as a discretionary termination clause—because the investors could exercise it at any time due to their majority stake—it nevertheless considered the option to be objectively justified within the context of the PE management model.
The fact that the plaintiff did not share in ongoing profits but only in the exit proceeds did not diminish the incentive and retention function; rather, it was consistent with the typical value-creation logic of private equity structures. Nor does the plaintiff’s considerable risk (purchase at market value, no share in ongoing profits, risk of a buyback at a loss) lead to his stake being given independent weight vis-à-vis his role as managing director. The decisive factor for the Federal Court of Justice was that, due to the ownership structure and approval requirements, the plaintiff had virtually no influence; his stake served primarily as an incentive, not as a means of becoming a full-fledged co-owner.
Conclusion
In doing so, the Federal Court of Justice (BGH) provides legal certainty for standard management incentive programs, particularly in private equity and venture capital structures.
Leaver call options are permissible under corporate law if the equity interest remains, in practical terms, an ancillary component of the employment relationship, the managers’ actual influence is limited, and the incentive nature of the option is clearly recognizable—even in cases of genuine risk-taking and purely exit-oriented equity interests. The actual points of contention thus shift to the level of severance pay and valuation rules, as well as specific exercise practices.
In terms of design practice, this means:
- The “annex” nature of management equity investments should be clearly articulated from a conceptual standpoint.
- Managers' decision-making authority should be limited.
- Call events should be closely tied to the manager's position or role.
- “Good/Bad Leaver” and evaluation mechanisms should be designed to be transparent, in line with market standards, and moderate.
