Federal Court of Justice rules in favor of private equity funds: Traditional call options in management participation programs are valid
Federal Court of Justice, ruling of February 10, 2026 – II ZR 71/24
What is the issue?
As part of a private equity investment program, a managing director was given a stake in an investment limited partnership (Beteiligungs-KG) at market value as a limited partner. There was no provision for a share in current profits. Instead, he – like the private equity fund involved – was only to earn a share of the profits in the event of a successful exit, i.e., a subsequent sale of the company.
This was a classic management participation program with the usual leaver provisions: as long as the managing director works for the group, he remains a participant. If he leaves the group — whether voluntarily or involuntarily — the majority shareholder can buy back his shares via a so-called "call option." The purchase price for the shares differed depending on the reasons for leaving and provided for different purchase prices for a "good leaver" and a "bad leaver" .
This is exactly what happened: the managing director was duly dismissed as managing director by the majority shareholder without giving reasons and his employment contract was terminated, whereupon the shareholders exercised the call option. He received around €35,000 for his shares based on the currently determined market value – significantly less than his original investment of €150,000.
The managing director filed a lawsuit, arguing that the call option was invalid because it allowed the majority shareholders to force him out of the company at any time and without reason. Such a clause was unconscionable, he argued.
The lower courts ruled in favor of the managing director – but the Federal Court of Justice did not.
The Augsburg Regional Court and the Munich Higher Regional Court considered the call option to be invalid. Their main argument was that the managing director had invested real money and borne a real economic risk. His shareholding was therefore more than just an appendage to his position as managing director and could not simply be withdrawn by means of a call option.
The Federal Court of Justice overturned the appeal ruling and ruled that the call option was not unconscionable in this case.
What does the Federal Court of Justice say — and why is this important?
The Federal Court of Justice (BGH) first confirms that termination clauses that allow a majority shareholder to buy out a manager from the company without cause can, in principle, be void under the German Commercial Code ( ). However—and this is the good news for practitioners and financial investors—the Federal Court of Justice also clarifies that there are exceptions to this rule, defining these exceptions much more generously than before and explicitly including classic call options from financial investors in these exceptions.
Three points are particularly relevant for practice:
Firstly: Overall assessment of the "management model". Until now, there has been concern in practice that a call option would only be effective if it met exactly all the criteria established by the Federal Court of Justice in an older decision from 2005. The Federal Court of Justice now clarifies that it is not a rigid "checklist" that matters, but rather an overall assessment of all the circumstances of the individual case in order to objectively justify a call option. The previous criteria are taken into account in the assessment, but they are not mandatory requirements and do not have to be met in their entirety. The decisive aspects in the overall assessment are the specific contractual arrangements in each individual case, the personal circumstances and the significance of the shareholder position in relation to the operational role in the company, as well as the specific purpose of the right of exclusion.
Secondly: an exit participation instead of ongoing profits is not a problem. The Munich Higher Regional Court had argued that the lack of participation in ongoing profits argued against the effectiveness of the call option because it lacked the "reward function" of the participation. The Federal Court of Justice clearly disagrees: A share in the exit proceeds instead of in current profits is the standard model for financial investors and is completely legitimate. The exit participation is comparable to a bonus payment for a successful business transaction and corresponds to the private equity business model, which from the outset is geared towards increasing value and realizing this value in the context of a sale.
Thirdly: even genuine investment by the manager does not cause any harm. The manager had acquired his shares at market value and thus assumed a real economic risk – he did not receive a symbolic investment or financial assistance from the investor, as in many previous cases. The Munich Higher Regional Court saw this as a reason for the call option to be invalid. The Federal Court of Justice ruled differently: the assumption of an economic risk by the manager does not in itself preclude the validity of the call option. On the contrary: those who are financially at risk are more likely to actively exercise their shareholder rights and will not be deterred from exercising their shareholder rights by the financial investor and the threat of the call option being exercised. The Federal Court of Justice therefore even cites this circumstance as an additional argument for the validity of the call option.
The result: call options in private equity investments are effective
As a result, the Federal Court of Justice ruled in favor of call options, which are typically used by private equity investors in the "management model", and their effectiveness, and clearly stated this. Even a call option that can be exercised in the event of a purchase as a result of unilateral termination by the company without a reason specified by the manager, i.e., typical "good leaver" call options, can therefore be validly agreed upon, as in the case decided here. The Federal Court of Justice sees the need for a corrective measure at most at the level of exercising control over the specific call option and the appropriate purchase price as a severance payment arrangement.
Abuse control remains possible
The ruling does not mean that private equity funds can now dismiss managers at will. The Federal Court of Justice expressly points out that the specific exercise of the call option is subject to control in individual cases and must meet the requirements of good faith in order to prevent abusive exercise. However, the Federal Court of Justice sets the bar high: anyone who exercises the call option shortly before an exit, for example, in order to deliberately deprive the manager of his share of the proceeds, must expect a court to classify the exercise as an abuse of rights in individual cases.
Separation of call option and severance payment provision
Another point relevant to practice: The Federal Court of Justice continues to make a strict distinction between the validity of the call option as such and the question of whether the associated severance payment arrangement is appropriate. Even if the severance payment turns out to be too low, this does not invalidate the call option. These are two different issues that must be assessed separately. The question of whether the manager receives enough money for his shares only concerns the validity of the severance clause – not the question of whether he can be forced to leave at all. However, the fund must be aware that if the court considers the purchase price to be too low in an individual case and the call option has already been exercised, the market value of the purchased shareholding will have to be paid without the possibility of unilaterally withdrawing from the purchase.
What does this mean in practice?
This ruling is good news for private equity funds and majority shareholders who set up management participation programs:
The Federal Court of Justice has expressly recognized the common private equity structure — management participation with exclusive exit proceeds participation and call option in the event of early departure — as an objectively justified model. The argument that the manager has invested "real money" and therefore cannot be dismissed does not hold water if the participation is contractually linked to the manager's executive activities or other personal involvement. In this case, the private autonomy of the parties takes precedence.
Conversely, the following applies to managing directors and managers: anyone who joins a management participation program should be aware that the participation usually stands or falls with the active role in the company and the good conduct of the participant. The BGH decision strengthens the position of investors in recovering shares after a manager leaves the company.
In future, managers should pay particular attention to severance pay arrangements: because the Federal Court of Justice strictly separates the validity of the call option from the question of the amount of severance pay to be paid, the question of appropriate compensation upon departure rather than the question of the validity of the purchase becomes the central point of negotiation.
The ruling gives private equity funds significantly more certainty in the design of their investment programs — but still requires a sense of proportion in their exercise.
