“Leavers” generally refers to shareholders, founders, or employees who stop being involved in a company. The circumstances under their departure from the company would determine whether they are classified as “good” or “bad” leavers.
Good and bad leaver provisions are typically included in a company’s articles of association rather than in a shareholders’ agreement. This is because the articles provide stronger protection for the company and its shareholders if a departing shareholder attempts to sell or transfer shares in breach of the agreed rules. Where the provisions are contained in the articles, any transfer made in breach of those rules can usually be treated as invalid. By contrast, if the provisions appear only in a shareholders’ agreement, the available remedies are often more limited and may not prevent the transfer from taking effect.
Good Leaver
Good leavers generally refer to shareholders of a company who fall under the following:
- Passed away
- Suffered sufficiently serious deterioration of physical or mental health that:
- prevents them from following through with their work, or
- severely impacts their earning capacity
- Retired at a normal age of retirement
- Resignation for good and justified reasons
The concept of “good leavers” is intended to recognise shareholders who demonstrate loyalty by remaining vested for extended periods or until specific milestones are met.
For these situations, some companies have shareholder agreements that include clauses that establish the value of shares belonging to “good leavers.” Typical approaches involve independent assessments or pre-established, agreed-upon calculation methods. Companies or majority shareholder often have the right to buy out a “good leaver’s” shares, ensuring continuity for the company and the departing shareholder.
Bad Leaver
Bad leaver provisions generally apply when a shareholder exits the company under circumstances that are less favourable, such as:
- Resignation without good reason or within a short period of time after becoming a shareholder
- Breach of shareholders’ agreement
- Termination for cause (due to misconduct, illegal activity or violating company policies and regulations)
Such provisions are imposed to safeguard the interests of other shareholders in the company. In these cases, the bad leaver may sell their shares at a discount to the market value – or no value at all, often dependent on the degree of harm or misconduct that they have committed. Such mechanisms are used to protect the financial and commercial interests of the company, and to deter shareholders from acting in a way that would be unfavourable or detrimental to the company or other shareholders.
Importance of Leaver Provisions
Leaver provisions are primarily included to protect the companies’ interests, maximise membership productivity, and serve as a medium for reward or penalty towards members based on their performance and contributions towards the company. However, it is important to ensure that leaver provisions are not unfair or unnecessarily harsh to the extent where members feel coerced to stay within the company to avoid financial backlash despite their interests not aligning with the company any longer. This also sets out clearly the conditions and procedures for leavers to avoid disputes and disagreements over uncertainty and the transfer or sale of shares.
Contact Nath Solicitors
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.