Good/bad leaver clauses in shareholder agreements

Good/bad leaver clauses are key elements in shareholder agreements, especially in growth companies and start-ups, where the owners are often actively involved in day-to-day operations. These clauses are often structured as a right of purchase and regulate how an owner can leave the company and at what value the ownership shares must be transferred upon exit. The purpose is to create a clear and fair framework for leaving the company – both when it happens under acceptable conditions and when it happens under circumstances that may harm the company.

Good Leaver

A good leaver leaves the company under legitimate and acceptable circumstances, which are typically not due to breach of contract or conflict. This could be, for example, due to retirement, death, permanent illness, termination as a result of restructuring, or resignation by mutual agreement. In these cases, it is recognized that the departing owner has acted loyally and in the company’s best interests.

It is common practice that a good leaver is entitled to receive the market value of their ownership shares. The valuation is typically performed by an independent party, such as a certified public accountant, and is based on the company’s financial situation, future earnings potential, and any goodwill.

A well-designed good leaver clause ensures that the exit takes place on fair terms and without causing unrest among the owners or disrupting the company’s operations.

Bad Leaver

A bad leaver leaves the company under circumstances that are considered unacceptable or harmful to the company and the other owners. This could be, for example, breach of the owner agreement, disloyal behavior, breach of confidentiality or competition clauses, or termination without consent. In such cases, consideration for the stability of the company and protection of the remaining owners is crucial.

In such cases, it is common for the departing owner not to receive full market value for their ownership shares. Instead, the price may be set at a reduced value, e.g. at the nominal value of the company’s capital or at a fixed discount, which may be defined in the shareholders’ agreement (e.g. 50% of the market value). The discount acts as a sanction and an incentive to comply with the provisions of the agreement.

It is crucial that the shareholders’ agreement clearly and precisely defines what constitutes a bad leaver situation and how the valuation is to be made. Unclear wording can lead to interpretation doubts, internal conflicts and, in the worst case, litigation, which can damage both the company’s reputation and finances.

The importance of clear exit mechanisms in the ownership structure

In any company with multiple owners, it is crucial to think holistically – not only in terms of growth and strategy, but also in terms of how the collaboration can be terminated in an orderly manner. Exit mechanisms such as good/bad leaver clauses and deadlock provisions are not just legal formalities – they are strategic tools that protect both the company and the owners and ensure the right incentives for business operations and compliance with the agreement entered into by the owners. When roles, rights, and consequences of withdrawal are clearly defined, transparency and security are created among the owners. This reduces the risk of disagreement and ensures that all parties have a common understanding of the rules of the game – even when the collaboration is challenged.

Especially in growth companies, where the owners are often actively involved in the operation, it is important to ensure that an owner cannot leave the company on terms that harm the business or the other owners. A well-written shareholder agreement with clear exit clauses is therefore not only a protection against the unexpected – it is an investment in the company’s long-term stability and value creation.

Shareholder agreements are a crucial foundation for any company with multiple shareholders – not only as a legal document, but as a strategic tool to ensure stability, predictability and trust among the owners.

If you have any questions regarding the above, please feel free to contact Commercial Lawyer and Partner Thomas Hvid Kjær from Raadgiver.dk ApS at +45 71 99 06 10 or thomas@raadgiver.dk.

This article does not constitute and cannot replace legal advice. Raadgiver.dk ApS assumes no liability for any damage or loss, directly or indirectly, attributable to the use of the information provided in the article.