Leaver provisions within shareholders’ agreements and articles of association: good leaver vs bad leaver explained

Without clearly drafted leaver clauses in place, a departing shareholder could:

• retain full rights to their shares, including voting and dividends
• continue to benefit from the company’s growth without contributing
• cause tension, deadlock, or disputes among remaining shareholders

Including leaver provisions helps to:

• ensure equity is held by active participants
• protect the company and continuing shareholders
• maintain a committed and aligned ownership structure
• reduce the risk of litigation or shareholder disputes

Well drafted leaver clauses are essential for maintaining control and stability in a company.

Most leaver provisions classify departing shareholders into one of two categories: good leaver or bad leaver. 

Good leaver – definition and treatment

A good leaver is someone who exits the company under acceptable circumstances, such as:

• retirement
• death or permanent disability
• redundancy
• termination without fault 

Typical treatment of shares

Good leavers may be allowed to:

• retain some or all of their shares
• sell their shares at fair market value
• receive full value in recognition of their contributions

Bad leaver – definition and treatment

A bad leaver is a shareholder who departs under adverse or unacceptable circumstances, including:

• resignation without notice
• breach of contract or fiduciary duties
• gross misconduct
• competing with the company after departure

Typical treatment of shares

Bad leavers are often:

• required to sell their shares at nominal value; or
• have their shares converted into deferred shares which hold limited capital rights

This punitive treatment is designed to deter harmful behaviour and protect the business from disruption.

Some companies also introduce a third category known as intermediate leavers. 

These individuals leave the business under circumstances that don’t clearly qualify as either ‘good’ or ‘bad’ — for example, voluntary resignation after a long period of service but before a key vesting milestone. 

The treatment of intermediate leavers is usually somewhere in between, they may receive partial market value for their shares. Including this category allows for greater flexibility and fairness in how leavers are handled.

Vesting provisions are often used alongside leaver clauses to determine how much equity a shareholder is entitled to keep when they leave the company. 

Vesting typically means that shares are earned gradually over time, for example, over a four-year period with a one-year cliff. 

If a shareholder leaves before their shares are fully vested, they may forfeit some or all of their unvested shares even if they are a good leaver. 

Good leavers usually retain or be paid fair value for any vested shares as a minimum. Bad leavers may forfeit even their vested shares.

Leaver provisions are a vital part of corporate governance. Whether a shareholder leaves on good or bad terms, these clauses ensure the company can respond in a fair, consistent, and legally enforceable way.
By clearly defining good and bad leavers, and including the right terms in both the shareholders’ agreement and articles of association, companies can protect their structure, ownership, and long-term stability.