Virtual share options when calculating compensation for non-competition

When calculating compensation for a post-contractual non-competition clause in accordance with Sections 74 et seq. of the German Commercial Code (HGB), benefits from a virtual stock option program are also included. However, this only applies if the option rights were exercised while the employment relationship was still in place, according to the Federal Labor Court in its ruling dated March 27, 2025 (8 AZR 63/24).

Facts of the case

The ruling of the Federal Labor Court (BAG) is based on the following facts: The plaintiff was employed by the defendant from October 1, 2019 with a fixed gross annual salary of EUR 100,000.00. The parties had entered into a post-contractual non-competition clause within the meaning of Sections 74 ff. HGB. The defendant granted the plaintiff virtual share options, which in principle did not constitute an entitlement to the transfer of shares, but to a payment in cash. The virtual option rights initially had to be “earned” in stages by working during a “vesting period” over a period of up to four years. After expiry of the vesting period, the options could be exercised provided that an exercise event occurred in the form of a share deal, asset deal or IPO. After the occurrence of such an event in September 2021, the plaintiff exercised already vested option rights. The defendant settled these options in October 2021 at a gross amount of EUR 161,394.79. The employment relationship between the parties ended on June 30, 2022 due to a termination agreement. After the termination of the employment relationship, the plaintiff exercised further option rights, which the defendant settled in October 2022 with a gross amount of EUR 17,706.32.

The plaintiff took the view that all payments made by the defendant on the basis of virtual share options should be included in the calculation of the compensation for the post-contractual non-competition clause. The lower courts only included the services provided by the defendant under the virtual stock option program during the current employment relationship when calculating the compensation for non-competition, but not those provided after the end of the employment relationship.

Reasons for the decision

The appeals of the plaintiff and the defendant were unsuccessful before the Eighth Senate of the Federal Labor Court.

In the opinion of the court, the benefits provided by the defendant under the virtual stock option program during the current employment relationship are part of the contractual benefits last received by the plaintiff pursuant to Section 74 (2) HGB in the form of variable remuneration within the meaning of Section 74b (2) HGB. They would constitute consideration for the work performed by the plaintiff in the employment relationship. When calculating the compensation for waiting time, they are to be taken into account in accordance with Section 74b (2) HGB with the average of the last three years or the duration of the existence of the relevant contractual provision - in this case 33 months. The decisive factor is that the option rights were exercised during the existing employment relationship in the period of Section 74b (2) HGB. On the other hand, benefits paid by the defendant due to the exercise of option rights after the termination of the employment relationship were not included in the last contractual benefits received within the meaning of Section 74b (2) HGB. They were therefore not to be included in the calculation of the compensation for waiting time.

Practical advice

Post-contractual non-competition clauses are often expensive. The BAG's decision - which is only available as a press release so far - may make them even more expensive. This shows once again that employers should carefully examine in which cases post-contractual non-competition clauses make sense and are worth their price.

The decision does not cover share options issued by the parent company, for example, in international groups. Only payments made by the contractual employer are relevant for the calculation of compensation for non-competition.

For board members and managing directors to whom Sections 74 ff HGB are not directly applicable, other contractual arrangements can be made. In such cases, the basis for calculating any compensation for non-compliance may be defined in the contract. A blanket reference to the provisions of the HGB should therefore not be made lightly.