Recent Federal Court of Justice (BGH) decision on the admissibility of so‑called dismissal clauses (Hinauskündigungsklauseln) in management equity participations – refined guidance for corporate practice and contract drafting

The participation of external managing directors as partners in the companies they manage is a common structuring tool to align shareholder and management interests and to retain the management team. Often, the corporate position as partner is functionally tied to the office of managing director, so that the end of the management mandate also leads to loss of the participation. Against this background, the Federal Court of Justice recently had to rule on the validity of a dismissal clause.

Facts (BGH, judgment of 10.02.2026 – II ZR 71/24 – abbreviated)

The claimant, a managing director in the private‑equity sector, acquired a limited partnership interest at fair market value of approx. EUR 150,000. There were no current profit rights; a participation in proceeds was only provided for in the event of an exit. The partnership agreement linked partner status to the management mandate and granted a call option in favour of the other partners, exercisable upon any termination of the office of managing director (so‑called free dismissal clause). After removal from office and ordinary termination of the service agreement without reason, the call option was exercised at fair market value; the claimant received only approx. EUR 35,000 (about 20% of his initial investment). He sought a declaration that the clause was void as being contrary to public policy under section 138(1) BGB; the lower courts held the structure void.

The BGH ruling of February 10, 2026 – II ZR 71/24 

The Federal Court of Justice reaffirms its settled case law that free dismissal clauses – provisions allowing exclusion of a partner without objective reason – are in principle contrary to public policy and therefore void under section 138(1) BGB, as they restrict the partner’s freedom of decision and enable arbitrary exclusions.

At the same time, the Court further develops its “manager model” jurisprudence. A free dismissal does not necessarily presuppose that the managing director bears no or only minor economic risk. A fair‑market‑value, risk‑bearing investment can also be permissible, since it serves the legitimate interest of incentivising responsible management. The decisive criterion is an overall assessment of all circumstances. By way of exception, a free dismissal clause may be objectively justified and valid if, given its design, the participation has no material independent significance compared with the position as managing director. Pure exit‑related proceeds participations are considered typical and appropriate for private‑equity structures, as they resemble bonus payments and still ensure retention of management. The validity of the dismissal clause and the adequacy of the severance mechanism must be assessed separately.

Regardless of its basic validity, the exercise of the dismissal right is subject in each individual case to a review for abuse of rights under section 242 BGB (good faith). There is a particular risk of abuse if exclusion is timed shortly before an exit to the detriment of the manager. As the Higher Regional Court of Munich had not yet carried out this review, the case was remitted 2.

Practical Note

The decision is of considerable importance for structuring management equity participations, especially in private equity:

1. The validity of dismissal clauses remains exceptional; what matters is a holistic assessment of structure and interests, not isolated features such as current profit participation or freedom from loss.
2. Fair‑market‑value investments are, in principle, permissible if the participation has no substantial independent weight compared with the management mandate.
3. The exercise of the dismissal right must always be tested against section 242 BGB; an abusive exclusion – in particular shortly before an exit – may render the specific exercise invalid.
4. The validity of the dismissal clause and the appropriateness of the severance arrangement must be examined independently.

In practice, parties should (a) document carefully the functional link between the participation and the management mandate and (b) in a dismissal scenario, assess whether the specific exercise of the right is abusive.