German court ruling grants validity to call options for management stock ownership

German courts have long been reluctant to recognise ‘call options’ allowing shareholders to expel a co-shareholder without cause. Generally, a shareholder may not be excluded from his or her company without good cause. In a recent decision, however, the German Federal Court of Justice (the Bundesgerichtshof, or “BGH”) ruled that call options may be valid in the context of management shareholdings – even if the repurchase price is significantly below the initial purchase price.

Manager participation is a key instrument in the context of private equity. It is intended to create incentives, align the interests of both investors and management, and promote the growth in value of a company. At the same time, a structural problem regularly arises in practice. If a manager leaves – particularly by dismissal – there is typically no longer any interest in retaining him or her as a shareholder. The implementation of this “exit” under corporate law, however, raises numerous legal questions. Some of these were the subject of the BGH’s decision of 10 February 2026 (Case No. II ZR 71/24), which is discussed in this article.

The managing director of a group subsidiary acquired a stake in the group’s parent company through an intermediate holding company. His indirect stake in the parent company amounted to 0.38% of its share capital. He paid a fair market value price of EUR 149,984.46 for the acquisition of his stake in 2021. The investment agreement provided that the managing director would not receive dividends, but rather a share of the proceeds from a planned sale of the corporate group. Moreover, it provided for a call option for the other shareholders in the intermediate holding company should the managing director withdraw from office.

Just one year later, the managing director was removed from office by shareholders’ resolution. Subsequently, the co-shareholders in the holding company exercised their call option. They determined a market value for the managing director’s stake of EUR 35,173.68 as purchase price. In his lawsuit, the former managing director asserted that the call option was invalid and that he remained a shareholder of the intermediate holding company.

The Regional Court and the Higher Regional Court granted the claim, citing an earlier decision by the BGH on exclusionary termination clauses (judgment of 19 September 2005 – Case No. II ZR 173/04). The BGH overturned these decisions and remanded the case to the Higher Regional Court for a new hearing.

In doing so, the BGH first took the opportunity to defend its previous decisions on call options against criticism from legal scholarship. According to the BGH, a call option that allowed for the exclusion of a shareholder without just cause constituted a serious encroachment on the rights of the affected shareholder who would always fear losing his or her shareholder status. It encouraged a “tyranny of the party entitled to exclusion.” 

The BGH emphasises that call options are not per se invalid. A call option termination clause is permissible if the shareholder status is an accessory to the position of managing director. Such a manager’s equity interest is typically granted “for a limited term.” It serves as an incentive during the manager’s active tenure and is regularly functionally linked to his or her position on the board. If the manager leaves this position, the basis for his or her equity interest under company law also ceases to exist. The company must have the option to grant the new managing director an equity interest in the company in place of the departing one.

Against this background, the BGH considered the call option at issue to be valid. The decisive factor is that the participation was structured from the outset as a time-limited instrument. The manager could not have relied on remaining a shareholder permanently. The contractual provision considers the legitimate interest of the investors in reorganising the shareholder structure following a manager’s departure.

Interestingly, the BGH did not consider the significant discrepancy between the purchase price and the sale price as a ground for invalidity. The possibility that the repurchase price may be below the original purchase price must be accepted in the context of management shareholdings, reflecting the risk-reward profile of such investments. The manager participates disproportionately in the event of success, but in return also risks an economically disadvantageous exit.

Exercising the call option in a moment of economic downfall, however, could violate the principle of good faith if it were intended to prevent the managing director from participating in a later sale of the corporate group. It could also exploit the most favourable possible valuation of the company for its or the other shareholders’ own benefit. For this reason, the Federal Court of Justice did not dismiss the action but remanded the case to the Higher Regional Court for a new hearing and decision. 

The decision confirms that exit mechanisms like call options can be structured effectively, but this requires consistent integration into the overall concept of management participation. Clearly, participation is functionally linked and time limited, and the exercise of any call option must be considered in good faith.