Good Leaver / Bad Leaver Clause Template (Copy, Paste & Adapt)

Good Leaver / Bad Leaver Clause (Sample):

If a shareholder (including any director or partner) in this partnership, startup, or limited liability company ceases to be employed or involved with the company, their shares shall be transferred as follows:

- Good Leaver: If departure is due to death, disability, redundancy, retirement, or other reasons agreed in writing, the company or remaining shareholders shall purchase the shares at fair market value.
- Bad Leaver: If departure is due to resignation (without consent), dismissal for cause, or breach of agreement, the company or remaining shareholders shall purchase the shares at [par value or a discounted price, as specified]

What is a Good Leaver / Bad Leaver Clause?

A good leaver / bad leaver clause sets out what happens to the shares of a director, partner, or shareholder who leaves a partnership, startup, or limited liability company after incorporation. It distinguishes between “good leavers” (who leave for acceptable reasons and receive fair value) and “bad leavers” (who leave under less favourable circumstances and may receive only nominal value).

Who Needs It and Why?

• Best for: Startups, partnerships, limited companies, and their directors or employee shareholders.

• Key risk if missing: Departing directors or partners could keep shares and block decisions, or leave with a windfall they haven’t earned.

• Typical UK challenge: If not included in the shareholders’ agreement or articles of association, disputes over valuation and entitlement are common.

How It Works in Practice

Example:
A director in a limited liability startup resigns to join a competitor. As a “bad leaver,” they must sell their shares back at nominal value. If they had left due to redundancy or ill health, they’d be a “good leaver” and receive fair market value.

Common Pitfalls and Legal Nuances

• The clause must be in the shareholders’ agreement or articles of association to be enforceable for any partnership, startup, or limited company.

• Definitions of “good leaver” and “bad leaver” must be clear and not overly harsh, or they risk being challenged.

• Valuation methods should be objective and transparent.

FAQ

1. Can a director or partner negotiate their leaver status?
Yes, but it’s best to agree the terms at incorporation or before any dispute arises.

2. Is a good leaver / bad leaver clause automatic in UK law?
No, it must be written into your shareholders’ agreement or articles of association.

3. What if the clause is too harsh?
If the terms are punitive or unclear, they may be challenged in court or lead to unfair prejudice claims.

4. Who decides if someone is a good or bad leaver?
The clause should specify the criteria and process—often the board or remaining shareholders decide, but this must be fair.

5. Can the buyout price be disputed?
Yes, if the valuation method isn’t clear or objective, disputes are common.

Summary / Action Steps

• Review your shareholders’ agreement and articles of association for a good leaver / bad leaver clause, especially if you’re a director, partner, or shareholder in a startup, partnership, or limited liability company.

• If missing, negotiate its inclusion before any exits or disputes.

• Use the template above as a starting point, but adapt it to your company’s needs and structure.

Disclaimer: This content is for general information only and does not constitute legal, financial, or tax advice. Outcomes may vary depending on your individual circumstances.