Shareholders, including founders or key employees, provide services to a company and will often be subject to ‘leaver’ provisions. This means that if they leave the company, it triggers the ability of the company to require the leaver to sell some or all of their shares. This serves as an incentive for the founder or employee to remain working for the company. Leaver provisions also protect the company from passive shareholders holding a significant stake in the company after they leave. There are generally two different types of leaver events – good leaver events and bad leaver events. This article will set out the common definitions and outcomes of good and bad leaver events.
Your Shareholders Agreement
You can find leaver provisions within your company’s shareholders agreement. A well-drafted shareholders agreement will define good and bad leaver events while setting out how the company should deal with different types of leavers. Having these provisions in place ensures that the shares of a leaving shareholder can be rightfully earned and distributed.
What are Good Leaver Events?
Good leaver events occur when a shareholder can no longer provide services to the company for reasons outside of their control or where the shareholder has not caused harm to the company. They may include any of the following events, which are committed by a shareholder, or a director appointed by a shareholder:
- voluntarily resigning as a director or employee of the company;
- becoming incapacitated by illness or injury;
- being terminated in circumstances where the employee is not at fault; or
- being made redundant by the company.
Your shareholders agreement should set out what happens to the shares of a shareholder who commits a good leaver event. Typically this will result in the company being able to require the shareholder to sell some or all of their shares for fair market value.
Continue reading this article below the formWhat are Bad Leaver Events?
Bad leaver events occur when the shareholder commits some kind of fault which causes harm to the company. These may include any of the following events, which are committed by a shareholder or a director appointed by a shareholder:
- a material breach of the shareholders agreement;
- a material breach of the shareholder’s employment or consulting agreement;
- breaching a restrictive covenant (like a non-competition or restraint of trade clause); or
- committing fraud or an indictable criminal offence.
The shareholders agreement also needs to set out what happens when a bad leaver event occurs. Typically this will result in the company being able to require the shareholder to sell all of their shares at a discounted price. For example, a 20% or 50% discount to fair market value.
A well-drafted shareholders agreement will typically also include a power of attorney clause. This clause grants shareholders a power of attorney in favour of the company directors. Likewise, they can then enforce any obligations a shareholder fails to comply with. This is useful for being able to enforce leaver provisions, for example, if a shareholder refuses to sign the required transfer documents.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
Good leaver and bad leaver event clauses are not standard clauses in shareholders agreements, but they are recommended. It would be unfair to treat shareholders leaving on a good leaver event the same as those leaving on a bad leaver event. Leaver provisions can motivate founders and employees and deter behaviour that is detrimental to the company. They can also be attractive to potential investors in the event that you decide to raise capital.
For more information about key terms to include in your shareholders agreement, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions?
You can find leaver provisions within your company’s shareholders agreement. A well-drafted shareholders agreement will define good and bad leaver events while setting out how the company should deal with different types of leavers.
The law defines bad leaver events very narrowly, given their onerous consequences. For example, a shareholder is often a good leaver if they cease to be employed or engaged by the company for any reason other than being a bad leaver.
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