When you sell part of your business and stay on to run it, you hold shares and a job at the same time. The two are tied together more closely than many owners realise. If the job ends, a leaver clause can require you to sell your shares, and the reason the job ended can decide if you're paid what they're worth or very little.
The same clauses are used when an owner gives or sells shares to a manager, so this guide looks at them from both sides. Most of it applies to limited companies, where the clauses sit in the articles of association and the shareholders' agreement.
What a leaver clause does
A leaver clause, sometimes called a compulsory transfer provision, is triggered when a shareholder stops being an employee or director of the company. Their shares are then offered to whoever the clause names, often the company itself or the other shareholders. The leaver usually has no choice about selling. What they're paid depends on which kind of leaver they are.
There's nothing like this in company law itself, or in the model articles. Without a leaver clause, someone who leaves keeps their shares, with the votes and dividends that come with them, for as long as they like, even if they've gone to work for a competitor. That's why anyone buying part of a business, or giving shares to managers, usually wants one. The clause normally sits in the articles, so it binds whoever holds the shares, and is repeated in the shareholders' agreement.
Who counts as a good leaver
There's no standard definition, and it varies from deal to deal. A good leaver is usually someone who leaves for reasons outside their control, or on terms everyone agreed. The list often includes these.
- Death.
- Serious ill health or permanent incapacity.
- Retirement at an agreed age, or after an agreed period.
- Redundancy.
- Dismissal that a tribunal or court later finds was unfair or wrongful.
- Any other case where the board agrees to treat the leaver as a good leaver.
Who counts as a bad leaver
A bad leaver is usually someone who leaves in a way that harms the business, such as these.
- Resigning within a set period after getting the shares.
- Being dismissed for gross misconduct or fraud.
- Breaking restrictive covenants, such as working for a competitor.
- Being made bankrupt.
Some deals add a very bad leaver, for the most serious misconduct, at an even lower price. The wording to watch most closely is the catch-all. Some clauses define a good leaver narrowly and make everyone else a bad leaver. Under that wording, an owner who resigns after 12 years of running the business could be treated the same as someone dismissed for fraud.
Intermediate leavers and vesting
Plenty of departures fit neither definition neatly, so some clauses add an intermediate leaver, paid somewhere between the two prices. A manager who leaves after a few good years, and doesn't join a competitor, is the usual example.
Vesting is a related idea. Shares are treated as earned over time, for example monthly over three years, so the longer someone stays, the more of their shares are bought at the better price when they go. Shares that haven't vested are usually bought back for little or nothing, even from a good leaver. Vesting suits shares given to a manager to earn. If you're an owner keeping shares in a business you built, ask why it should apply to them at all.
How the price is worked out
| Type of leaver | Price usually based on |
|---|---|
| Good leaver | Fair value, or market value |
| Intermediate leaver | Something in between, such as fair value less an agreed discount |
| Bad leaver | The lower of fair value and what they paid, or the shares' nominal value |
A made-up example shows how far apart these can be. A manager pays £5,000 for 5% of a company. Four years later they leave, and their shares have a fair value of £60,000. As a good leaver they'd receive £60,000. As a bad leaver under a clause paying the lower of fair value and cost, they'd receive £5,000. Under a nominal value clause, they might receive a few pounds.
Fair value sounds settled, but the clause has to say what it means. These are the points that move the number most.
- Who sets it. Usually the leaver and the board try to agree it, and if they can't, an independent valuer decides, often an accountant.
- Any minority discount. A small holding that doesn't control the company can be valued at less per share than its share of the whole. The clause should say whether that applies. Our guide to how to value a business covers how the whole is valued.
- The date. Value on the day you leave can differ from value months later, when the transfer happens.
- Payment. If the company buys the shares, the law says they must be paid for when they're bought, and only from profits available for the purpose or new shares issued to fund it, with limited exceptions. If there isn't enough, the clause should say what happens next.
How the transfer happens
The mechanics are usually set out step by step. When someone leaves, they're treated as having offered their shares for sale, or the company serves a notice requiring them to. The price is then fixed under the clause, by agreement or by the valuer. The buyer pays, and the leaver signs a stock transfer form. If they won't sign, the clause can let a director sign it on their behalf, and the money is held for them until they collect it.
Check the time limits. A clause that lets the company wait a year before deciding whether to buy leaves you holding shares you can't sell, at a price that may have moved. A deadline for the notice, and another for payment, protects both sides.
What the courts have said about bad leaver prices
A bad leaver price can look like a punishment, and the courts won't enforce a penalty clause. In 2015, in Cavendish Square Holding v Makdessi, the Supreme Court looked at a sale agreement under which a seller who broke his restrictive covenants could be made to sell his remaining shares at a price that left out goodwill. It held that the clause wasn't an unenforceable penalty. The parties had negotiated on equal terms with expert help, and the buyer had a real interest in protecting the goodwill it was paying for.
That doesn't mean every leaver clause will be enforced exactly as written. Disputes over whether someone is a bad leaver do reach the courts, and each turns on its own wording and facts. The safe assumption is that whatever you sign will apply to you.
If you're the owner keeping a share
After a part sale, your co-owner often controls the board, and shareholders can remove a director by ordinary resolution. A loosely drafted leaver clause would let them end your role and then buy your shares cheaply. These are the points to ask for.
- Being dismissed without good cause makes you a good leaver.
- Retiring after the agreed handover makes you a good leaver.
- Resigning after an agreed number of years makes you a good leaver.
- Good cause is defined narrowly, such as fraud or gross misconduct, and isn't left to the board's opinion.
- Fair value means your proportion of the value of the whole company, with no minority discount.
- You're paid in full when the shares are transferred, or given security for anything paid later.
Bad leaver definitions usually link to the promises you make not to compete or approach customers after you leave, so read the two together. Our guide to restrictive covenants explains what's usually negotiated.
If you're giving shares to managers
From the other side, leaver terms protect the owners who stay. A manager who leaves for a competitor shouldn't keep a share of the profit they've stopped helping to make, and shares that come back can be offered to whoever replaces them. If your managers might one day buy the business from you, through a management buyout, the terms you set now will shape that conversation.
There's a tax point to settle before any shares are issued. Shares a manager gets because of their job are employment-related securities. Where a leaver clause means they could have to sell for less than market value, the shares are usually restricted securities. The employer and the manager can jointly elect to be taxed on the shares as if the restrictions didn't exist. That can mean more income tax when the shares are acquired, in exchange for removing a later charge under these rules. The election has to be made within 14 days of the shares being acquired, so your accountant needs to be involved before the paperwork is signed, not after.