The Importance of Leaver Provisions in Shareholders' Agreements and Articles of Association

In a shareholders' agreement and articles of association, leaver provisions are essential clauses that define what happens to a shareholder's shares when they leave the company. These provisions are crucial in determining whether a departing shareholder must sell their shares, how much they will be paid for those shares, and how the reason for departure affects the value or transfer process. Leaver provisions are especially important where shareholders are also employees, directors, or founders.

Key Takeaways:

• Leaver provisions help determine whether a departing shareholder must sell their shares, how much they will be paid for those shares, and how the reason for departure affects the value or transfer process.
• Without clearly drafted leaver clauses, a departing shareholder could retain full rights to their shares, including voting and dividends, and cause tension, deadlock, or disputes among remaining shareholders.
• Leaver provisions are essential for maintaining control and stability in a company, ensuring equity is held by active participants, and protecting the company and continuing shareholders.
• Leaver provisions classify departing shareholders into two categories: good leaver or bad leaver, with good leavers being treated more favorably, typically allowing them to retain some or all of their shares, sell at fair market value, or receive full value in recognition of their contributions.
• Bad leavers, on the other hand, are often required to sell their shares at nominal value or have their shares converted into deferred shares with limited capital rights.
• Some companies introduce a third category, intermediate leavers, with a treatment that is usually somewhere in between good and bad leavers.
• Vesting provisions are often used alongside leaver clauses to determine how much equity a shareholder is entitled to keep when they leave the company.

Statistics:

• The typical definition of a good leaver includes retirement, death, illness, redundancy, or misconduct (Russell-Cooke Law Firm).
• Good leavers may be allowed to retain some or all of their shares, sell at fair market value, or receive full value in recognition of their contributions (Russell-Cooke Law Firm).
• Bad leavers are often required to sell their shares at nominal value or have their shares converted into deferred shares (Russell-Cooke Law Firm).
• Vesting provisions are used to determine how much equity a shareholder is entitled to keep when they leave the company, with shares earned gradually over time, for example, over a four-year period with a one-year cliff (Russell-Cooke Law Firm).

Sources:

• Russell-Cooke Law Firm. (n.d.). The importance of leaver provisions in shareholders' agreements and articles of association.
• Russell-Cooke Law Firm. (n.d.). Leaver provisions: understanding the difference between good and bad leavers.