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In a shareholders' agreement, the good leaver/bad leaver clause ensures that the circumstances of departure determine the price a shareholder receives for their shares. A good leaver—someone who leaves due to death, illness, or a similar reason beyond their control—typically receives market value. A bad leaver—someone who commits fraud or violates their non-compete clause—receives a reduced price, sometimes even just the nominal value. Sounds simple; the details are everything.
Bram and Joris did not have a leaver scheme. When one of their future co-shareholders, Sanne, was diagnosed with cancer and wanted to exit, a discussion arose regarding the price that no one can conduct without embarrassment. Good news: they resolved it amongst themselves. Better news: their current shareholders' agreement does address this. In this article: what good and bad leaver mean, which triggers belong to which category, and how to formulate the scheme.
The short answer
A leaver scheme links the price of departing shares to the reason for departure. Four questions to get started:
- What is a “good” reason to leave in your BV?
- What is a “bad” reason?
- Which price belongs to which category?
- Who determines retrospectively which category someone falls into?
The entire clause rests on those four questions. The following paragraphs will go through them one by one.
Who is a good leaver?
A good leaver leaves for a reason beyond their control, or one that is actually desirable for the company. Common triggers:
- Death.
- Long-term incapacity for work or serious illness (often defined as incapacity for work of, for example, six or twelve months).
- Retirement at the agreed age.
- Dismissal without a reason attributable to the shareholder, or termination by the BV through no fault of his.
- In some cases: voluntary departure after a long period of service (for example, at least five years).
The price for a good leaver is typically the market value or a fair value of the shares — often determined via a pre-agreed formula or an independent registered valuer.
Who is a bad leaver?
A bad leaver leaves for a reason attributable to himself, or that causes damage to the BV. Usual triggers:
- Dismissal for urgent reasons (fraud, theft, serious dereliction of duty).
- Violation of the non-compete or non-solicitation clause.
- Breach of confidentiality.
- Voluntary departure within an agreed short period (for example, within two years of joining) — sometimes also referred to as an “early leaver”.
- Bankruptcy of the shareholder (or if the shares are set for execution).
The price for a bad leaver has been reduced. How significantly? That varies: from the nominal value of the shares (often symbolic, €0.01 or €1 per share), to 25% or 50% of the market value, or a specific formula. However, the court critically assesses extreme consequences using the open norms of Book 2 of the Dutch Civil Code (reasonableness and fairness, Article 2:8) — a total forfeiture of shareholder rights may be deemed unreasonable in exceptional cases, certainly if the shareholder has made a substantial contribution.
The middle category: regular leaver or early leaver
In addition to good and bad leavers, legal experts often use an intermediate category for situations that are not clearly good or bad. For example: voluntary departure after four years (too short for a good leaver, not bad enough for a bad leaver). For this “regular leaver,” a price often applies between market value and nominal value, sometimes via a sliding scale that depends on the number of years of service.
A common arrangement, in simplified form:
- Leave within 2 years: bad leaver price.
- Departure between 2 and 5 years: fortress scale, increasing.
- Departure after 5 years: good leaver price.
- Plus the above triggers (death, illness, etc.) automatically make a good leaver, regardless of duration.
Who determines which category someone falls into?
This is where most arguments arise in practice. Three models:
- The general meeting decides — risky in the case of equal representation, because then a party can condemn or exonerate itself.
- The board decides, with the possibility of appeal — often works well if the board is sufficiently independent.
- An independent third party decides — for example, a mediator or a registered appraiser. Slower, but the most neutral.
In the event of a conflict, a combination is often established: the board or the general meeting makes an initial proposal, and an independent third party decides in the event of a dispute. This prevents deadlocks from which the entire BV suffers.
How do you draft a good leaver clause?
Four elements that must be clearly defined in every leaver clause:
- Definitions. What is “incapacity for work”? From how many months? What falls under “urgent cause”? No “by mutual agreement” — make it concrete.
- Price mechanism. What is the price in each category? Which formula, which parameters, which valuator? In case of disagreement: binding advice or arbitration?
- Procedure. How much time does the departing shareholder have to make an offer? Within what timeframe do the others purchase? Payment term? In case of non-payment: interest?
- Obligation to offer. To whom does the departing shareholder offer his shares — all co-shareholders pro rata, or in order of priority?
A common mistake: merely mentioning the label (“good leaver”, “bad leaver”) without elaborating on the definition or the pricing mechanism. That invites discussion.
Practical examples
Three scenarios we frequently encounter, with the implementation that usually works:
- Key employee receives shares. Fortress in four years, with a one-year cliff. Upon departure within the first year: bad leaver price on everything. Thereafter: sliding scale, with good leaver status upon dismissal through no fault of their own.
- Two founders, 50/50. Both good leavers upon death, illness, or voluntary departure after five years. Non-compete clause triggers bad leaver status and applies for at least two years after departure.
- External investor. Typically no leaver status — that person is not an employee and their investment is their investment. However, agreements regarding sales options and lock-up are in place.
Honest recommendation
A leaver scheme is one of the most emotionally charged components of a shareholders' agreement — and therefore one of the least demanding to arrange via a checklist, and where specialist experience counts the most. The correct wording depends on the role of the shareholder, the stage of the company, and the type of departure you wish to discourage or reward.
To draft or review a decent leaver arrangement: view the options for having your shareholders' agreement drafted or reviewed. For the other clauses: what is included in a shareholders' agreement and what is a shareholders' agreement.
Frequently Asked Questions
A shareholder who leaves for a reason beyond their control or one that is desired, such as death, long-term disability, retirement, or dismissal through no fault of their own. A good leaver typically receives the market value or a fair value for their shares.
A shareholder who leaves for a reason attributable to themselves, such as dismissal for urgent reasons, fraud, violation of a non-compete or non-solicitation clause, or voluntary departure within a short period. A bad leaver receives a reduced price for their shares, sometimes even the nominal value.
The difference lies in the reason for departure and, linked to that, in the share price. Good leaver = full or market value, bad leaver = reduced price. The circumstances therefore determine how much a shareholder receives for their shares.
In principle, freedom of contract applies, but extreme consequences may be mitigated by a judge if they are unreasonable. A reduced price is common; full forfeiture of shares can be vulnerable when assessed against reasonableness and fairness, especially if the shareholder has made a substantial contribution.
That depends on what is stipulated in the shareholders' agreement. Generally, the board or the general meeting decides, calling upon an independent third party (mediator, valuator) in the event of a conflict. Avoid a mechanism in which parties condemn or exonerate themselves.
An intermediate category for situations that are not clearly good or bad. For example, voluntary departure after four years. Often linked to a vesting scale in which the price increases the longer the shareholder is involved.
In the shareholders' agreement. The leaver arrangement is a personal agreement between shareholders and therefore does not belong in the public articles of association. The articles of association only regulate the blocking mechanism for transfer; the finer mechanisms are contained in the shareholders' agreement.
