Good and bad leaver provisions refer to business plans that deal with the shares of shareholders leaving the business. The difference between the two terms is that each deal with the manner in which the person exits the company. Good leaver provisions refer to scenarios where they leave due to reasonable circumstances. Bad leaver provisions refer to exits as a result of misconduct or actions that are contrary to a prior agreement. Most Shareholder Agreements will include such provisions and are a vital consideration for any new business that will have shareholders.
Here we break down how and when they should be used.
Good leaver provisions
These provisions deal with circumstances in which a shareholder leaves the company for a fair reason. Namely, examples include:
- Retirement.
- Due to illness or injury.
- Death.
- Unfair dismissal.
- Constructive dismissal.
- The company is winding up or being deregistered (in the event of it being a company).
In return, the leaving person will have their shares sold back to the company and receive the proceeds. However, the actual terms of the provision will vary depending on the business. These will include things like how to calculate the sale share value and how the remaining shareholders divide the returning shares.
These leaver provisions are important to ensure trust between the business and shareholders. Shareholders who feel that there is a safety net for unforeseeable events are more likely to invest further and help grow your business.
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Bad leaver provisions
As the name implies, these provisions refer to shareholders leaving the company on unreasonable terms. As a result, the leaver’s shares may be sold at a nominal rate below market value or under some other predetermined agreement. These terms may be for misconduct that:
- Jeopardises the reputation of the business.
- Places the directors, shareholders or business into disrepute.
- Consistently fails to meet the standards of the shareholder’s duties or expectations of the business.
Furthermore, these terms will also cover situations that breach the Shareholder Agreement. Breaches may include:
- The disposal of shares contrary to the agreement.
- Sharing trade secrets.
- A material breach of the agreement.
However, how these provisions work will depend on the individual agreement. While there some general provisions that are encouraged, it is recommended that you speak to a lawyer to consider what may suit your business best.
Final thoughts
Ultimately, when forming a Shareholders Agreement it is vital that proper care is taken to form strong good and bad leaver provisions. Without these, you may inadvertently encourage poor shareholder practice and jeopardise your business. Likewise, trust and goodwill that supports leavers in the event of unfortunate circumstances will encourage trust between shareholders. If you are unsure where to start, LawPath offers Shareholder Agreement templates.
