Bad leaver disputes usually arise when a shareholder, director, founder or senior employee is leaving a business and there is disagreement about what happens to their shares or options.
The financial consequences can be substantial. Someone classified as a bad leaver may be required to transfer shares for significantly less than a good leaver, lose options or face allegations that they have breached restrictive covenants.
We act for departing shareholders and directors challenging their treatment, as well as companies and remaining shareholders seeking to enforce existing leaver provisions.
Can leaver status be negotiated on exit despite clauses being in place?
Often it can.
Where both sides face uncertainty, leaver status and share value can potentially form part of a wider negotiated exit.
This might deal together with:
good or bad leaver status;
the price paid for shares;
treatment of options;
payment terms;
resignation as director;
employment termination;
restrictive covenants;
confidentiality; and
settlement of potential claims.
Resolving these issues together can sometimes be considerably more effective than allowing separate employment, shareholder and contractual disputes to develop. We have negotiated combined exits of this kind, bringing together leaver status, share price and wider settlement terms into a single resolution.
How we can help
We act for companies and remaining shareholders as well as founders, directors, employees and departing shareholders.
We can help with:
Challenging bad leaver status – establishing whether the contractual trigger actually applies and challenging an incorrect classification.
Enforcing leaver provisions – advising companies on compulsory transfers and dealing with a shareholder who refuses to cooperate.
Share valuation disputes – challenging or defending the proposed valuation and dealing with expert valuation procedures.
Forced exits – advising where someone believes they are being removed specifically to trigger an unfavourable share transfer.
Compulsory transfers – establishing whether shares must be sold, to whom, at what price and under what procedure.
Share options – advising on vested and unvested options and any discretion available under the scheme.
Misconduct allegations – establishing whether alleged conduct actually triggers bad leaver treatment.
Conflicting documents – determining how the articles, shareholders' agreement, employment documents and scheme rules work together.
Restrictive covenant issues – dealing with competition, solicitation and confidential information allegations linked to leaver status.
Negotiating an exit – seeking an agreed outcome on leaver status, share value, options and the wider terms of departure.
Wider shareholder disputes – advising where the leaver issue is part of a breakdown between founders or shareholders.
Classified as a bad leaver – how to challenge
The fact that a company calls you a bad leaver does not necessarily mean that the contractual requirements have been satisfied.
The first step is to review the relevant documents and exactly what happened when you left. Important questions can include:
Did a bad leaver event actually occur?
Did you resign or were you effectively forced out?
Was your dismissal valid under the relevant provisions?
Can alleged misconduct or contractual breaches be established?
Did the company follow the required procedure?
Does the board have discretion over your classification?
Are different definitions used in different company documents?
Where the difference in share value is significant, challenging the classification itself may be commercially important.
Forced sale of shares
Leaving employment or ceasing to be a director does not automatically terminate your shareholding.
The company will normally need an effective contractual or constitutional mechanism requiring a transfer. The articles, shareholders' agreement and other relevant documents need to be checked for the trigger, procedure, valuation provisions and consequences of non-compliance.
If the relevant conditions have not been satisfied, there may be grounds to challenge the proposed compulsory transfer.
Conversely, companies can encounter serious problems where a departing employee or founder refuses to transfer shares despite a valid leaver provision. We can advise on enforcing the transfer mechanism and the steps available if they will not cooperate, drawing on our wider experience acting for companies and remaining shareholders in shareholder and director disputes.
Valuing shares for bad leavers
This is often where the real dispute lies.
Depending on the documents and leaver status, the price might be based on:
market or fair value;
original subscription price;
nominal value;
the lower of cost and market value; or
another contractual formula.
Even where market value applies, there may be substantial disagreement over the valuation date, company performance, minority discounts and the appropriate valuation methodology.
The documents may also provide for an independent accountant or valuer to determine the price. It is important to establish whether that determination is binding and precisely what assumptions the expert is required to use. We regularly instruct and work with expert valuers in shareholder disputes, including cases where minority discounts and valuation methodology are directly in issue.
Leaving due to being forced out
This can be one of the most contentious situations.
A founder or senior individual may simultaneously be a shareholder, director and employee. The remaining shareholders may remove them from management or terminate their employment and then seek to trigger a compulsory transfer of their shares at an unfavourable price.
The circumstances leading to the departure therefore matter. Depending on the facts, the dispute may involve contractual rights, employment issues, directors' duties and potentially unfair prejudice or other shareholder remedies. We have extensive experience acting in unfair prejudice claims, including a recent dispute arising from a shareholder’s exclusion from management ahead of a compulsory share transfer, which we successfully defended.
If you believe you are being pushed out specifically so that your shares can be acquired cheaply, take advice before agreeing an exit or transferring your shares.
Company documents and leaver clauses inconsistent
Leaver disputes often require several documents to be considered together, including the articles, shareholders' agreement, investment agreement, employment or service agreement and option scheme rules.
They may contain different definitions, procedures or consequences.
We can establish which provisions apply, whether one document takes priority over another and whether the company is relying on the correct contractual mechanism.
Bad leaver status based on misconduct
Companies sometimes rely on allegations of misconduct, breach of contract, competition or other wrongdoing to trigger bad leaver provisions.
Those allegations should not simply be accepted at face value. It may be necessary to establish what actually happened, whether it falls within the contractual definition and whether there is sufficient evidence to support it.
For companies, making a bad leaver determination without properly establishing the underlying conduct can increase the risk of a subsequent challenge.
Leaver clauses and alleged breach of restrictive covenants
A leaver dispute can overlap with allegations that someone has joined a competitor, approached customers, solicited employees, used confidential information or established a competing business.
The company may argue that this conduct triggers bad leaver treatment as well as breaching restrictive covenants.
Both issues need to be considered separately. A restriction may itself be disputed, and an alleged breach will not necessarily trigger bad leaver consequences unless the contractual wording provides for it. We have advised on cases where alleged competition or solicitation was said to trigger bad leaver status, including securing a prohibitory springboard injunction and damages against a competing individual in a related dispute.
Get advice before taking irreversible steps
Leaver disputes are often easier to deal with before the departure and share transfer have been completed.
Resigning, accepting termination terms, signing a settlement agreement or transferring shares can affect the position. For companies, incorrectly triggering leaver provisions can itself create significant litigation risk.
If you are being classified as a bad leaver, are being asked to transfer your shares or are dealing with a departing shareholder who will not cooperate, we can review the documents and circumstances quickly and advise on the best way to protect your position. Our commercial litigation and corporate teams regularly work together on these disputes, for both departing individuals and the companies they are leaving.
