Understanding Good Leaver and Bad Leaver Provisions in a Shareholders' Agreement

A Shareholders' Agreement is a crucial document that outlines the rights and responsibilities of shareholders within a company, helping to establish a framework for decision-making, dispute resolution, and the overall governance of the business.

One key aspect of a well-drafted Shareholders' Agreement is the inclusion of provisions related to Good Leaver and Bad Leaver scenarios. These provisions aim to address the circumstances under which a shareholder may exit the company and the impact of such exits 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 beyond the shareholder's control and may include reasons such as death, disability, retirement, or 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 the case of a Good Leaver, the Shareholders' Agreement may provide various mechanisms to determine the value of the departing shareholder's equity, such as using a pre-agreed formula, an independent valuation, or a multiple of earnings.

Additionally, Good Leaver provisions may include clauses allowing the remaining shareholders or the company itself to purchase the departing shareholder's shares. This helps maintain stability and continuity within the company while safeguarding the departing shareholder's financial interests.

Bad Leaver

Conversely, a Bad Leaver is a shareholder who exits the company under less favourable circumstances, often due to voluntary resignation without good reason, termination for cause, or a breach of the Shareholders' Agreement.

Bad Leaver provisions are intended to protect the interests of the remaining shareholders by imposing consequences on the departing shareholder for their actions.

In the case of a Bad Leaver, the Shareholders' Agreement may stipulate that the departing shareholder receives a reduced value for their shares, possibly at a discount to the fair market value or even no value at all. This reduction in value serves as a deterrent and discourages behaviours that could be detrimental to the company or its shareholders.

The Agreement may also allow the remaining shareholders or the company to have a right of first refusal to purchase the Bad Leaver's shares.

Importance of Good Leaver and Bad Leaver Provisions

The inclusion of Good Leaver and Bad Leaver provisions in a Shareholders' Agreement is essential for several reasons:

• Fair Treatment: Good Leaver provisions ensure that shareholders who exit the company for reasons beyond their control are treated fairly and receive a reasonable value for their equity.
• Deterrence: Bad Leaver provisions act as a deterrent against actions that could be detrimental to the company or its shareholders, providing a level of protection for the business.
• Continuity: Both provisions contribute to the continuity and stability of the company by offering clear guidelines on the exit process for shareholders and minimising disruptions to the business.

Good Leaver and Bad Leaver provisions in a Shareholders' Agreement play a vital role in establishing a fair and structured framework for shareholder exits. These provisions help strike a balance between protecting the departing shareholder's interests and safeguarding the continuity and stability of the company.

When carefully drafted and agreed upon by all parties involved, Good Leaver and Bad Leaver provisions contribute to a more robust and predictable governance structure for the company.

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