Executive summary
Whether call option clauses in MPPs are justified in the context of Section 138 BGB must be determined on the basis of an overall assessment of the circumstances of the individual case. The overall economic context of the management participation must also be taken into account. The entrepreneurial nature of the manager’s participation does not preclude his function for the group from being taken into account as a contributing factor in the overall assessment. As the name suggests, management participation schemes cannot be viewed in complete isolation from the function of the managers.
The current ruling at a glance
In its ruling published on 5 March 2026 (Ref. II ZR 71/24), the Federal Court of Justice (BGH) overturned a ruling by the Munich Higher Regional Court (OLG) dated 23 May 2024 (Ref. 14 U 5289/23 e) and referred the matter for a new decision.
In the previous ruling by the OLG Munich, the court had declared the exercise of a repurchase right against a managing director who had been duly dismissed as a participant in an MPP to be unreasonable and invalid pursuant to Section 138 of the German Civil Code (BGB). As is customary in practice, the call option was structured as an irrevocable offer made in advance by the manager to repurchase his participation, which the investor could accept. The call option was intended in particular for the event of the termination of the manager’s activity with the group in which the participation took place.
The BGH adheres to the principles established in its so-called Manager Model decision of 2005 (Ref. II ZR 173/04): although free squeeze-out clauses are generally contrary to good morals and therefore null and void under Section 138(1) BGB. However, they are objectively justified if a managing director has been granted shareholder status because of his position as managing director and for the purpose of aligning his interests with those of the company, and if his shareholder status otherwise has no relevant independent significance. This does not presuppose that the managing director assumes no or only a minor economic risk with his participation.
The grounds for the decision consider the fundamental need of investors to secure the possibility of repurchasing the shareholding of a departing manager through call options in the context of MPPs. At the same time, the decision makes clear that in drafting practice, the specific circumstances of the individual case are of great importance.
Facts
A managing director took part in an MPP and therefore held an indirect interest of 0.38% in a company of the group for which he was working, pooled through a limited partnership that had been established specifically for the purpose of facilitating the participation of the managers of the group. The acquisition was made at the then prevailing fair market value. Participation in ongoing profits was not stipulated. Rather, the manager was to participate exclusively in the proceeds of a subsequent exit.
The partnership agreement of the limited partnership provided for a call option by which the majority shareholder could repurchase the manager’s interest as soon as the manager was no longer active (in this case: as managing director) for the group. With regard to the repurchase price, the partnership agreement distinguished between different reasons for leaving. These were categorised respectively as Good Leaver and Bad Leaver scenarios. In a Bad Leaver scenario, the relevant manager was to receive the lower of fair market value and acquisition costs; in a Good Leaver scenario, after the expiry of a four-year vesting period, the full fair market value; and prior to that, the fair market value of the vested portion.
In the present case, the claimant managing director was removed from office without reasons being stated and his service agreement was terminated by way of ordinary notice. The call option was subsequently exercised on the grounds that a Good Leaver event had occurred. The managing director brought an action for a declaration that he remained a limited partner and contended that the exercise of the call option was contrary to good morals by reason of a violation of Section 138 BGB.
Reasons for the ruling
The BGH continues to maintain that the mere possibility of depriving a shareholder of his shareholder status without proper grounds is, as a matter of principle, capable of creating an inhibiting effect on the free exercise of shareholder rights. This structural possibility to exert pressure makes (contrary to certain views expressed in the legal literature) an overall judgement under Section 138(1) BGB necessary. A mere review of the exercise of the right in accordance with the principle of good faith (Section 242 BGB) would not suffice. This position is not altered by the small scope of the participation (in this case merely 0.38%) or the de facto absence of any influence over corporate governance decisions.
The formal status as a shareholder remains legally relevant and worthy of protection. However, the structural coercive potential of a squeeze-out clause (also referred to as the “Sword of Damocles”) is not (contrary to the reasoning of the OLG Munich) neutralised by the promise of adequate compensation. In this regard, a distinction must be drawn between the validity of the squeeze-out clause and that of the compensation clause. Accordingly, for the purposes of assessing the validity of the call option, it is immaterial whether compensation at (in this case, the diminished) fair market value can be validly agreed.
Equally, the risk of total economic loss must not be taken into account negatively in the overall assessment. Ultimately, by virtue of his entrepreneurial participation, the manager may conversely also participate in any increase in value realised upon an exit; the relevant participation program is specifically designed with the exit in mind. It therefore does not diminish the purpose of the MPP that there is no participation in ongoing profits.
The principle of freedom of structuring must not be unduly restricted in the context of MPPs. The principle of party autonomy as well as the economic context of such participation models (in particular their character as an entrepreneurial participation oriented towards an exit) must be given significant consideration.
The overall assessment carried out by the OLG Munich fundamentally fails to recognise that, in the context of a management participation, the investor has no further interest in the continued participation of a departing manager and – depending on the circumstances of the individual case – must be able to put in place effective mechanisms for the repurchase of the participation.
Conclusion
The BGH’s ruling is aligned with the established practice of MPPs and takes their economic context into account. The confirmation of the fundamental possibility of providing for effective call option clauses within the framework of MPPs is therefore to be welcomed. At the same time, the BGH’s message that the validity of such clauses is dependent on the individual case must not be overlooked. Particular caution is warranted in the case of larger participations that do not exist solely in the context of employment (e.g. founder participations). The decision underscores the critical importance of careful, case-specific structuring and expert legal advice when designing management participation programs.