A shareholders’ agreement commonly includes a bad leaver provision. This protects the company from surrendering the ownership and control to employees who leave the company in a particular way, or shareholders who have committed certain breaches of the shareholders’ agreement. Examples include when the employee or shareholder has committed fraud, dishonesty or gross misconduct. Other examples include a failure to act in good faith or involvement in a conflict of interest against the company.

A bad leaver provision operates as a penalty against the individual who owns the shares. Interestingly, it effectively denies an individual a right to their property. So, when will the courts enforce such provisions?

The Importance of Company Documents

The Court in the English case, Grace v Biagioli considered that the individual’s conduct needs to be against the requirements of the corporate structure or company constitution. What this means is that the main consideration will be the legal documents and agreements between the shareholders, which outlines when the shareholders can and cannot do certain things.

If the Shareholders’ Agreement is unclear on this point, the individual can still argue that equitable principles should protect them. Another way to say this is that it would unfair to allow the provision to succeed after considering the Agreement and the conduct of the shareholder.

What are Bad Leaver Events?

Recently, an Australian Court provided some guidance as to what a bad leaver event entails in Zomojo Pty Ltd v Hurd (No 2). Here, the company’s ‘Plan Information Booklet’ contained their bad leaver provisions. In essence, the provisions stated that if you are a bad leaver, then at Zomojo’s option, you must transfer your shares to Zomojo or its nominee at the value equal to the lower net tangible assets, or, the last arm’s length transaction price.

Hurd was a director of Zomojo and had entered discussions to resign, and sell Zomojo his shares. At the time, the other directors did not know that Hurd  had engaged in ‘bad leaver’ behaviour. He had created a startup company that was pitching a device (a prototype circuit board), the equivalent to the one Zomojo was engaged in producing.

Zomojo sought to recover damages because if they had known this at the time of Hurd was developing this product, they would have been entitled to dismiss him immediately. The Court held that Hurd was indeed a bad leaver within the meaning of the provision, and ordered him to keep all of the profits he made from the sale of his devices on trust for Zomojo.

Key Takeaways

These examples demonstrate that the Courts will first look to the company documents and assess if their description of ‘bad leaver events’ is sufficiently clear. Enforcement depends on the individual’s conduct and the extent of the company’s detriment.


LegalVision can help your company draft a shareholders’ agreement that includes bad leaver provisions. This will ensure your company is protected in the long run. Call us today on 1300 544 755 to get in touch with one of our experienced business lawyers.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Bianca Reynolds
Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy