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Good Leaver/Bad Leaver? - 9th September 2016 - Click for larger version Good Leaver/Bad Leaver? - 9th September 2016

As Brexit dominates the political and economic thinking of UK plc, the Scottish commercial courts have recently been considering exits of a different nature.

The background of the case at hand was simple. A director had been forced to resign from the board of a logistics firm, after becoming implicated in bribery offences involving the company. The other shareholders argued that this made him a 'bad leaver' and that, under the terms of a shareholders' agreement, they were entitled to buy back his shares in the company at the price that he paid for them, rather than at their current market value of over £20 million, a difference of around £18m.

In this case, the courts effectively endorsed the operation of the bad leaver clause (rejecting the argument that it over-penalised the departing director).

The facts of the case aside, this judgement should give all companies a pause for thought when considering the shareholdings of directors in the company, and perhaps pose themselves (and their advisors) the following questions:

1. Does the company have adequate procedures in place to relieve a departing director of his shares if he leaves the company?

2. If so, do the procedures properly and fairly take account of the many different situations which could cause such an exit? For example – death, disability, retirement (which would tend to be classed as a good leaver) or alternatively – gross misconduct, or leaving to join a competitor firm (which most would view as a bad leaver);

3. Once the leaver’s “good”/”bad” status has been confirmed, does the company’s articles of association make proper provision to set the value of the leaver’s shares – usually fair value for good leavers and a suppressed or discounted value for bad leavers?

4. Finally, is it appropriate to take account of time during which the director has held the shares – for example if the director leaves before the maturity of a buyout project, should he be classed as an “early leaver” and be penalised, even if he isn’t a “bad leaver” as defined? By the same token, should the passing of time lead to a reduction in the penalty for leaving, “time off for good behaviour” as it were?

Of course, individual director-shareholders will be looking at this from the other side of the table, and considering carefully the terms on which they can leave the company (if so minded) and what the effect that action might be - particularly where that director may have significantly contributed to the growth in (and therefore stand to forfeit his share of) the company’s value over a number of years.

It’s fair to say that the subject of good leaver/bad leaver arrangements is a topic which no board of directors or director/employee shareholder can afford to ignore.

Our corporate team is on hand to explore these questions further with you.

Last updated: 11.14am, Friday 9th September 2016

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