A Shareholders’ Agreement is a crucial document that outlines the rights and responsibilities of shareholders within a company. It establishes a framework for decision-making, dispute resolution and the overall governance of the business.
A key aspect of a well-drafted Shareholders’ Agreement is the inclusion of Good Leaver and Bad Leaver provisions. These provisions address the circumstances in which a shareholder exits the company and the impact of that exit on the remaining shareholders.
Good Leaver
A Good Leaver is typically defined as a shareholder who exits the company under favourable circumstances. These circumstances are often outside the shareholder’s control and may include:
- Death
- Disability
- Retirement
- Resignation for good reason
Good Leaver provisions are designed to protect the departing shareholder’s interests and ensure a fair and equitable exit from the company.
In these situations, the Shareholders’ Agreement may include mechanisms to determine the value of the departing shareholder’s equity, such as:
- A pre-agreed valuation formula
- An independent valuation
- A multiple of earnings
These provisions may also allow the remaining shareholders or the company to purchase the departing shareholder’s shares. This helps maintain continuity within the business while protecting the shareholder’s financial position.
Bad Leaver
A Bad Leaver is a shareholder who exits the company under less favourable circumstances. This may include:
- Voluntary resignation without good reason
- Termination for cause
- Breach of the Shareholders’ Agreement
Bad Leaver provisions are intended to protect the remaining shareholders by imposing consequences on the departing shareholder.
The Shareholders’ Agreement may provide that the departing shareholder receives a reduced value for their shares. This may be:
- A discount to fair market value
- In some cases, no value at all
This reduction acts as a deterrent against actions that may harm the company or its shareholders.
The Agreement may also give the remaining shareholders or the company a right of first refusal to purchase the Bad Leaver’s shares.
Importance of Good Leaver and Bad Leaver Provisions
Including Good Leaver and Bad Leaver provisions in a Shareholders’ Agreement is important for several reasons:
- Fair treatment
Good Leaver provisions ensure that shareholders who exit for reasons beyond their control receive a reasonable value for their equity. - Deterrence
Bad Leaver provisions discourage behaviour that could be detrimental to the company or its shareholders. - Continuity
These provisions support stability by providing a clear framework for shareholder exits and reducing disruption to the business.
Good Leaver and Bad Leaver provisions play a vital role in creating a fair and structured approach to shareholder exits. They balance the interests of departing shareholders with the need to protect the company and its remaining stakeholders.
When carefully drafted and agreed by all parties, these provisions contribute to a more robust and predictable governance structure.