Many companies want to make sure that only those actively involved in the business hold and continue to hold shares. Without clear transfer rights that apply when a shareholder leaves (as employee and/ or director), you might find that you have no means of getting those shares back without a tussle of negotiation.

This is where a Leaver clause in a Shareholder Agreement or Articles of Association can come to the rescue. A Leaver clause triggers an automatic transfer of the shares held by the “leaver”, so there is a clear-cut way of getting shares back from someone no longer involved in the company.

How does this work in practice?

Imagine one of your employees is also a shareholder in your company. They’re later dismissed for gross misconduct, but because there are no leaver provisions in place, they could hang onto the shares; waiting for dividends and still have a say in the sale of the company (if no Drag clause in place) and get a payout on a sale.  To get those shares back now would involve some negotiation about value.

In other words, the employee who has damaged your business could still have influence and walk away with a healthy payout. This is where the benefits of a leaver clause can really be seen- leaver provisions could force the transfer of the shares held by the leaver, and by treating the employee as a “Bad Leaver,” they’d only get back a reduced amount for their shares- often at issue price and not fair value.

Now flip the situation. Picture a long-standing director who has been a valued member of the company over many years but needs to retire due to ill health.  A “Good Leaver” clause provides certainty that their shares will come back to the company or other shareholders and that the price will be fair value. This way, the leaver is treated fairly while the company maintains control of its shareholding, leaving everyone happy.

Essentially, good and bad leaver provisions ensure that departing shareholders get a fair deal based on the circumstance of their exit, as well as making sure that ownership of the company remains with those who continue to contribute positively to the business.

How do I define a Good or Bad Leaver?

When it comes to drafting, remember that things can be shaped around the needs of your company. You have a say in how the leaver clauses are set up!

For instance, you can decide what constitutes leaving on good or bad terms, and how shares are valued when someone exits- at full market value, by a set formula, or at a lower figure.

As a general rule:

A Good Leaver is generally someone who departs on good terms, often due to circumstances beyond their control, such as retirement, death, long-term illness, redundancy, or termination without fault.

By contrast, a Bad Leaver is typically someone who exits on negative terms, such as resigning without notice, breaching their duties, acting against the company’s interests, or being dismissed for misconduct.

It is also worth noting that Good and Bad aren’t the only categories of leaver. There might also be “early leavers” – where the trigger is any exit before a certain date.

Drafting Considerations

Leaver provisions are not one-size-fits-all. If they’re too rigid, they can lead to unfair results; if they’re too vague, they can cause disputes. The key is striking the right balance with clear definitions of “Good” and “Bad” leavers and a structure that reflects the needs of your business. Getting this right from the outset can save a lot of time, cost, and stress later down the line.

How Bhayani Law can help

At Bhayani Law, we understand that every company is different. Our specialist Company & Commercial team can help you draft or review leaver provisions to make sure they are practical, and reflective of what you really want. Whether you’re putting a Shareholder Agreement in place for the first time or checking that your existing agreement or Articles of Association reflect your intentions, we can guide you through the process with clear, tailored advice.

If you would like to find out more about how we can support you, get in touch with our team today on 0333 888 1360 or email [email protected].