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A leaver arrangement determines what happens to the shares of a departing manager-shareholder or founder. If someone leaves as a 'bad leaver' (under poor circumstances), they are often required to surrender their shares at a discount; a 'good leaver' receives the fair value. Lenders often enforce such an arrangement to protect their investment.
What is a leaver scheme?
A leaver arrangement, included in the shareholders' agreement, stipulates that a shareholder must offer their shares upon departure, and at what price. The good leaver/bad leaver distinction determines whether they receive the full value or a lower price—as an incentive to stay and behave well.
Good leaver versus bad leaver
A good leaver leaves for 'good' reasons (such as illness, death, or a proper termination) and typically receives the fair (market) value. A bad leaver leaves under bad circumstances (such as dismissal due to culpable conduct or competition) and must surrender their shares at a lower price or nominal value. You agree precisely on what constitutes good or bad.
Why lenders want this
Investors want to prevent a key person from leaving with a significant stake without contributing further, or a departing founder from harming the company. The leaver scheme protects the value of their investment and keeps key persons involved.
Pay attention to reasonableness
A bad-leaver reduction acts as an incentive but must not result in unreasonable consequences. An excessively severe 'penalty' may be mitigated under certain circumstances. Therefore, ensure the regulation is drafted carefully and in a balanced manner, with clear definitions and a workable valuation method.
Frequently Asked Questions
What is the difference between a good and a bad leaver?
A good leaver leaves for good reasons and receives the fair value; a bad leaver leaves under bad circumstances and sells the shares at a lower price.
Where do I record a leaver arrangement?
In the shareholders' agreement, with clear definitions and a valuation method.
Can a bad-leaver shortening be challenged?
An unreasonably heavy discount can be mitigated under certain circumstances. A balanced arrangement holds up best.
Drafting a leaver scheme?
Our legal experts incorporate a balanced leaver arrangement into your shareholders' agreement. View our corporate lawteam or schedule a free consultation.
