What is the Difference Between Bad and Good Leaver Events?

In Short

• Leaver provisions in a shareholders agreement ensure departing shareholders sell their shares under agreed terms, preventing unfair advantages.
• A good leaver exits due to reasons like redundancy or ill health, while a bad leaver leaves in a way that harms the company, such as breaching their contract.
• Bad leavers may be required to sell their shares at a discount, while good leavers may sell at fair market value.

Tips for Businesses

Clearly define good and bad leaver events in your shareholders agreement to avoid disputes. Ensure all shareholder-employees sign employment or contractor agreements to provide written evidence for enforcing leaver provisions. Having structured leaver rules helps protect the company’s long-term stability and ensures fair treatment for all shareholders.

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Table of Contents

• Shareholders Agreement
• What Are Good Leaver Events? 
• What Are Bad Leaver Events? 
• Key Takeaways
• Frequently Asked Questions

Many companies incorporate leaver provisions into the rules of their shareholders agreement. These leaver provisions apply when a shareholder or founder also contracted or employed by the company leaves the company. Under leaver provisions, typically, this departure would then trigger a compulsory transfer where the departing shareholder must sell their shares in accordance with the relevant process set out in the shareholders agreement (which might require the shares to be sold back to the company or to the remaining shareholders of the company).

Leaver provisions incentivise the employee shareholder or founder to remain working for the company long term, particularly in the startup context where businesses rely on services from their key employees or founders for success. There are two different types of leaver events: good leaver and bad leaver events. This article will outline the definitions and outcomes of both these events.    

Shareholders Agreement

Leaver provisions will usually be outlined in the company’s shareholders agreement. As the default rules under New Zealand law do not require a shareholder who has left a business to sell back their shares, it is important that these provisions are considered for the shareholders agreement, and included where necessary. The shareholders agreement will define what situations constitute a bad leaver versus a good leaver event as well as setting out the process for how the company should treat the different types of leavers.

Additionally, if a company seeks to enforce its good and bad leaver provisions in the shareholders agreement, keeping copies of underlying documentation is important. The company should ensure that any shareholders subject to the leaver provisions have entered into an employment or contractor agreement.

What Are Good Leaver Events? 

Broadly speaking, good leaver events occur when an employee or contractor shareholder has left the company on good terms or for reasons outside of their control. Usually, a good leaver has ceased to be employed or engaged by the company as a result of:

• voluntarily resigning as a director, employee or contractor of the company;
• becoming incapacitated by ill health or injury;
• being terminated in circumstances where the person is not at fault; or
• being made redundant by the company. 

The shareholders agreement will outline what happens to the good leaver’s shares in the event of their departure. Sometimes, a good leaver event will trigger a right (but not an obligation) for the board to direct that some or all of the shares held by the good leaver should be sold for fair market value (either back to the company or to a third party). 

In the context of startups, the underlying commercial rationale behind this compulsory transfer is that the shareholders have agreed that a shareholder who is no longer providing services to the company should not be entitled to the benefit of any increase in the share value.

What Are Bad Leaver Events? 

Bad leaver events are where an employee or contractor shareholder commits a fault that causes harm to the company. Specifically, a bad leaver is usually one who: 

• resigns from the company within one year of becoming a shareholder; 
• commits an act of fraud or criminal offence; 
• breaches their employment agreement; or 
• breaches any confidentiality or non-solicitation provisions. 

Bad leaver provisions seek to disincentivise these events and trigger a compulsory transfer when a bad leaver event has occurred.

While bad leaver provisions are important to consider and include where necessary, a well-drafted shareholders agreement should also include other company protections such as:

• confidentiality; 
• non-solicitation; and 
• intellectual property protections. 

Key Takeaways

Where relevant, good and bad leaver provisions are important to include in a company’s shareholders agreement. As there are no compulsory transfer requirements for a departing shareholder, shareholders must develop a uniform policy towards leaver events. Additionally, leaver provisions can help to ensure that founders and employees are motivated to continue providing services to the company and contributing to its growth. 

If you are drafting a shareholders agreement, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 447 119 or visit our membership page. 

Frequently Asked Questions