German Federal Court of Justice Strengthens Enforceability of Call Options in Management Equity Programs

With its decision of February 10, 2026 (II ZR 71/24), the German Federal Court of Justice (Bundesgerichtshof “BGH”) significantly strengthens the legal robustness of established private equity management equity structures in Germany while preserving targeted abuse control mechanisms.

The judgment strikes a pragmatic balance between protecting managers against arbitrary exclusion and acknowledging the legitimate structural logic of sponsor-driven value creation models. For private equity sponsors, portfolio companies and management teams, the decision represents an important and largely sponsor-friendly development in German management equity program (“MEP”) jurisprudence.

Background of the Case

On February 10, 2026 (Case No. II ZR 71/24), the BGH issued a landmark decision addressing the validity of leaver-related call option provisions in private equity-backed MEPs.

The case concerned a private equity sponsor-backed group structure in which managers participated indirectly via a limited partnership vehicle as part of a customary MEP. The claimant, a former managing director within the group, acquired his equity participation at fair market value and was entitled to participate exclusively in exit proceeds without entitlement to ongoing profit distributions.

Following his removal from office and termination of his service agreement, the sponsor exercised a contractually agreed call option to reacquire his partnership interest.

The lower courts had classified the call option as an impermissible “free exclusion clause” (freie Hinauskündigungsklausel) and therefore void. The BGH overturned this ruling and remanded the case for further review, in particular with respect to the good faith exercise of the call right.

Key Holdings of the Court

The BGH reaffirmed its established jurisprudence that contractual provisions allowing the exclusion of a co-shareholder without cause are, as a matter of principle, void unless justified by specific circumstances. Importantly, however, the BGH clarified that such justification may exist in market-standard private equity management participation structures.

A leaver-related call option can be legally valid where

• the equity participation is functionally linked to the manager’s service role
• the participation primarily serves incentive, retention, and alignment of interest purposes
• the shareholding does not have independent significance beyond the economic participation

The BGH emphasized that the assessment requires a holistic case-by-case abuse control analysis.

Recognition of Exit-Based Incentive Structures

The BGH expressly acknowledged that private equity business models typically focus on value creation and realization through a structured exit rather than ongoing dividend yield.

The BGH rejected the argument that an equity participation limited to exit proceeds undermines the structural legitimacy of a call option regime. It held that such arrangements may legitimately be compared to success-based or transaction-based incentive mechanisms aligned with a value-enhancement strategy.

This recognition is of particular relevance for buy-and-build platforms, growth equity investments, and classic buyout structures where management equity is designed to participate primarily in exit upside.

Entrepreneurial Risk Does Not Per Se Exclude Effectiveness

The claimant had invested at fair market value and bore full downside risk. The lower court viewed this co-investment element as giving the equity participation significance.

The BGH disagreed. It held that the assumption of genuine entrepreneurial risk — including the risk of value erosion — does not, in itself, transform the participation into an independently protected equity interest detached from the individual’s position as managing director.

The decisive factor remains whether the participation is structurally and functionally tied to the underlying management service relationship of the individual participant. The BGH’s clarification is especially significant for sweet and strip equity structures.

Strict Good Faith Review Remains

Crucially, the BGH reaffirmed that even a structurally valid call option remains subject to strict judicial review under principles of good faith (§ 242 BGB). The BGH expressly indicated that

• opportunistic timing of a dismissal shortly before a value-accretive exit,
• deliberate value shifting, or
• other forms of abusive conduct

may render the exercise of the call right unenforceable in an individual case. The case was remanded precisely for such an abuse-of-rights analysis.

This confirms that German courts will distinguish between the abstract validity of a leaver regime and its concrete implementation in a specific factual context.

No Ruling on Purchase Price Mechanics

The BGH explicitly distinguished between

• the validity of the call option clause itself
• the validity of the purchase price / valuation mechanics

While the existence of a “lower of fair market value and investment cost” mechanism does not render the call option per se invalid, the BGH did not rule on whether such pricing mechanisms — particularly in bad leaver scenarios — are substantively enforceable. The decision therefore provides structural clarity on call rights but not on the robustness of specific pricing constructs.

Practical Implications for Sponsors and Management

The decision provides comfort for sponsors structuring management equity programs under German law:

• Market-standard leaver call options in genuine equity-based MEPs can be legally justified.
• Exit-driven incentive mechanics are expressly recognized as legitimate.
• Management co-investment at fair market value does not, in itself, undermine structural validity.
• The key legal test focuses on functional linkage and overall economic rationale.

At the same time, sponsors should

• ensure that MEP documentation clearly reflects the incentive and retention purpose of the structure
• carefully structure valuation and bad leaver pricing provisions
• exercise call rights with sensitivity to timing and good faith considerations, particularly in proximity to an anticipated exit

Matters Not Addressed by the Decision

The ruling does not

• address virtual share, phantom share, or purely contractual incentive programs (which are typically subject to labor court scrutiny)
• provide definitive guidance on vesting-only or forfeiture-based models without genuine equity participation
• resolve open questions regarding the substantive enforceability of certain valuation and discount mechanisms