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Good Leaver Bad Leaver Clause

October 2016

This month we have created two new template shareholder agreements with good leaver bad leaver clauses added. The new templates are based on our popular basic shareholder agreements.

Good leaver bad leaver clauses are also known as shareholder employee dismissal and resignation clauses. Good leaver bad leaver clauses are a way for the company and the shareholders in a company to exert a level of control over shareholders in the company who are also employees. Good leaver bad leaver clauses are used as an incentive for employees to work hard and receive a share in the growth of a business but should the employee then decide to leave, the clause will dictate the terms on which his/her shares in the business are sold and the value that they will receive for their shares.

A good leaver is usually defined as an employee and shareholder of a company who dies, becomes incapacitated through physical or mental illness, is made redundant or is unfairly dismissed. A bad leaver is usually defined as anyone who is not considered to be a good leaver. Our new templates define good and bad leavers in similar terms. A good leaver will have the option but not the obligation to sell their shares on departure. A bad leaver is however obliged to sell his shares on exit to the other shareholders.

These new templates will be useful for a business where some or all of its shareholders are also employees. However as a shareholder’s agreement is a contract made between shareholders, care should be taken to make sure that the provisions of exit are dovetailed with the employee shareholder’s employment contract, the two are mutually exclusive. It may be necessary to seek formal legal advice.

We have also added two other new clauses into the new templates - restrictions on the shareholders (anti-solicitation, anti-competition etc) and an optional anti-corruption clause.

The Shareholder Agreement Comparison Notes have also been updated to take account of these two new shareholder agreements.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.

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