What are ‘Good Leavers’ and ‘Bad Leavers’?

‘Good Leaver’ and ‘Bad Leaver’ provisions are usually linked to pre-emption rights in either the company’s articles of association or in a shareholders agreement.  They can take different forms, but most commonly will provide that the price payable for the shares of a departing shareholder will depend upon the circumstances of his departure.

They operate where the pre-emption rights include mandatory transfer provisions which force a shareholder to offer his shares to the other shareholders in certain situations such as death, leaving the company’s employment, bankruptcy or breach of a shareholders agreement.  Usually if the situation does not arise from any ‘fault’ on the part of the outgoing shareholder such as death or where employment ends by retirement or due to ill health, he will be classified as a ‘Good Leaver’.  In other circumstances, such as dismissal for gross misconduct or bankruptcy, he will be classified as a ‘Bad Leaver’.  The provisions will usually then specify that the price which a Bad Leaver can demand for his shares is significantly less than that which a Good Leaver will be able to demand – Good Leavers will normally get market value, Bad Leavers often just a nominal amount.  As with any provisions in articles of association or shareholders agreements, these provisions must be carefully drafted.

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