If you’re running a company or preparing to issue shares to employees or co-founders, it’s important to think about what happens when someone leaves. Good leaver, bad leaver provisions help you manage this fairly and protect your business from future disputes.
These clauses, which are usually included in a shareholders’ agreement or the company’s Articles of Association, set out the terms on which a departing shareholder must sell their shares. They allow you to reward those who leave on good terms and limit the rights of anyone who leaves in less favourable circumstances.
Why Companies Use These Clauses
Good leaver/bad leaver provisions give structure and certainty to ownership arrangements. They protect the company’s shareholding base, discourage early exits, and help avoid problems with inactive shareholders who no longer contribute to the business.
They also give investors confidence that the share capital is controlled and can be reallocated if someone departs unexpectedly. For early-stage businesses, this is particularly useful when shares are tied to the contribution and performance of key individuals.
How the Clauses Work
When a shareholder leaves, the company or remaining shareholders usually have the right to buy back their shares. The price they receive depends on whether they are classed as a good or bad leaver.
A good leaver is typically someone who leaves for acceptable reasons, such as retirement, redundancy, long-term illness, or death. In these cases, it’s common for them to be paid a fair market value for their shares.
A bad leaver is someone who resigns early, is dismissed for misconduct, or breaches their obligations to the company. Bad leavers often receive a reduced value, or even just the nominal price they paid for the shares.
The definitions and treatment should be clearly set out in the shareholders’ agreement so there’s no uncertainty later.
When the Clauses Apply
You can tailor the definitions of good and bad leaver to fit your company’s structure and goals. What matters most is that they are clear, fair, and proportionate.
Defining a Good Leaver
Most businesses class founders or employee shareholders who leave through no fault of their own — for example, because of retirement, redundancy, or incapacity — as good leavers. You might also include people whose role ends following a sale of the company or business restructure. The idea is to treat genuine, unavoidable departures in a way that feels fair and consistent.
Defining a Bad Leaver
Bad leaver clauses are designed to protect the company from shareholders who leave on poor terms or damage the business. This could include dismissal for gross misconduct, breach of restrictive covenants, or resigning within a defined period or not delivering agreed targets. The early years are often the most sensitive, so many start-ups apply stricter terms during that time to prevent founders or employee shareholders walking away too soon.
Setting the Valuation
One of the key decisions is how to value the shares when a shareholder leaves. There’s no set formula, so you can decide what works best for your business.
Many companies link valuation to the reason for departure. For example, good leavers may receive full market value based on an independent valuation, while bad leavers receive a discount or only nominal value.
Whatever method you choose, you must make sure the process is transparent. You’ll need to state clearly how the valuation will be carried out, who will perform it, and when payment will be made. Clarity reduces the risk of later disputes and reassures investors that everyone is treated fairly.
Common Problems and How to Avoid Them
Even well-intentioned good leaver, bad leaver clauses can cause problems if they’re written in an unclear way. Most issues crop up because the definitions are vague, the valuation process isn’t explained, or the company documents contradict each other. Here are some examples of common problems related to poorly thought-out good leaver/bad leaver clauses:
Disagreements Over Classification
One of the most common disputes is how a departing shareholder is classified. If someone is dismissed for underperformance or resigns because of internal tensions, it might not be obvious whether they should be treated as a good or bad leaver. Ambiguous wording often leaves too much room for interpretation. You should define these terms very precisely, using consistent language across all agreements.
Valuation Challenges
Valuation is another minefield. If the agreement doesn’t specify how to calculate the share price, disagreements are almost inevitable. You should decide in advance whether an independent valuer will be used, how they’ll be appointed, and when the valuation will take place.
Inconsistent Documents
Sometimes the issue isn’t the clause itself, but how it interacts with other company documents. If the shareholders’ agreement and Articles of Association use different terms or give different powers, it might cause confusion and delays. Keeping both documents aligned and reviewed by the same legal team keeps things consistent and avoids any uncertainty.
Updating the Clauses as the Company Grows
As your company expands, the original good leaver, bad leaver provisions might no longer reflect how the business operates. Early-stage agreements are often written with a small founding team in mind, but once new senior hires join, the company’s priorities can shift. Investors may want stricter terms to protect their investment, while management might prefer clearer or more flexible rules to retain key people.
When you make changes, they must be properly documented. This usually means obtaining shareholder approval and, where the clauses appear in the Articles of Association, passing a special resolution to amend them. The updated documents should then be filed and circulated so that everyone is working from the same version.
How a Solicitor Can Help
If you’re drafting a shareholders’ agreement, it’s worth getting legal advice on your good leaver, bad leaver provisions from the outset. A solicitor can:
- Draft definitions and valuation clauses that fit your company’s structure and funding plans.
- Align the terms with your Articles of Association and any investment agreements.
- Help you balance fairness to employees with strong protection for the business.
- Review existing clauses before an investment round or company sale.
Clear clauses give your company stronger protection against disputes and help build confidence among investors and senior employees.
Speak To JPP Law
At JPP Law, our solicitors regularly advise founders, directors, and shareholders on good leaver, bad leaver provisions and other shareholder matters. We can help you draft, review, or amend these clauses so they are fair, practical, and legally sound.
If you are negotiating a shareholders’ agreement, dealing with a leaver dispute, or preparing for an investment round, contact JPP Law today for clear legal advice tailored to your business.
