Articles of Association: good leaver/bad leaver

Articles of Association: good leaver/bad leaver

Standard Article comprising good and bad leaver compulsory share transfer clauses.

Background

What are good and bad leaver clauses?

Under general company law, there is no default requirement for an employee shareholder who leaves the business to sell their shares. This may be unattractive both for investors in the business and for the remaining employee shareholders. Often, founder or other employee shareholders may have significant stakes in the company. If they are permitted to retain these when they are no longer employed, this will reduce value for both existing shareholders and potential new investors. It will also disincentivise both the remaining and new management team, whose future endeavours will enhance the shareholding value of someone who is no longer involved in the success and management of the business.

How do good and bad leaver clauses operate?

Good and bad leaver clauses are included in the company’s Articles of Association.  A shareholder who is an employee of the company is required to offer their shares for sale if their employment ends.

The cessation of employment can be in circumstances where the employee is either:

• a good leaver: good leaver circumstances usually include death, illness and termination of employment by the company which amounts to wrongful or constructive dismissal
• a bad leaver: bad leaver circumstances usually include the employee voluntarily ending the employment and dismissal by the company for misconduct

The price which the departing employee will receive for their shares will depend on whether the employee is a good leaver or a bad leaver.

• a good leaver will usually receive “fair value” for their shares.
• a bad leaver will usually receive reduced value for their shares.  This will often only be their nominal value or the amount which the employee originally paid for the shares if acquired on exercise of an employee share option.

Do good and bad leaver clauses apply to founders?

For a founder shareholder, the good and bad leaver clauses might be varied in a number of respects. This will depend on the circumstances of the business and the terms negotiated between the founder and investors.

For an investment in an established business, the founder may be reluctant to accept that all of the founder’s shares could potentially be bought back or that the founder should not receive fair value for them.

From the investor’s perspective, the investor may require that a founder who leaves, even if a good leaver, in the early years of the business operations should not receive fair value for all of the founder’s shares.

About this document

This document comprises standard good and bad clauses for inclusion in the Articles of Association of a private limited company.

Document features

• good leaver and bad leaver definitions
• provision for a founder’s shares to vest over a period of time
• mechanism for leaver’s shares to be offered to the company, to new employees and to the remaining shareholders
• determination of fair value by an independent accountant

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