What are Good Leaver bad leaver clauses?

If an employee, director or contractor holds shares in the company they are working for, they may be subject to what is called ‘good leaver’ / ‘bad leaver’ clauses. These clauses are often found in the company’s shareholders agreement or in its articles of association.

These clauses come into effect when the engagement or employment of the employee, director or contractor terminates. At that point, they may be required to sell their shares back (either to the company or to other shareholders). The price at which their shares can be bought back will be determined according to whether the leaver is defined as a ‘good leaver’ or a ‘bad leaver’.

A ‘bad leaver’ is usually defined as an employee or contractor who breaches their contract in some way, or who are dismissed for gross misconduct. By contrast, a good leader is often defined as someone who leaves the employment for any other reason that hasn’t been specifically covered in the ‘bad leaver’ clause.

However, it’s important to realize that these terms can be defined in many different ways, and even small differences can have a big impact in practice on what happens to a person’s shares when they leave their employment. So, it’s important that these terms are carefully drafted.