In the context of M&A transactions, it is common to find various clauses designed to ensure that founders, key partners and investors are committed to the company and that their exit does not represent a loss for the company.
Within a company, there are various clauses and mechanisms used to regulate and ensure the commitment of key personnel, such as vesting clauses and lock-up clauses, among others.
On this occasion, we will focus on explaining bad leaver and good leaver clauses, which are contractual provisions linked to the context of a business transaction. These clauses confer specific rights to key players within the company in relation to shareholdings in the company, and these rights vary depending on how their relationship with the company is resolved.
What is good leaver?
Good leaver clauses refer to circumstances of termination that are generally beyond the control of the practitioner. These may include events such as death, serious illness or other reasons that justifiably lead to the termination of their relationship with the company. In addition, good leaver termination causes may also include situations where the professional is not responsible for the termination of the contract, such as dismissals declared unfair or unilateral and voluntary termination of the business contract by the company.
The partner or professional may leave due to:
- Death or total or partial incapacity of the relevant member of the Management Team that prevents the exercise of their professional functions.
- Collective dismissal affecting the key personnel concerned or objective termination for economic, organisational, technical or productive reasons.
- Dismissal recognised by the Company or declared by a final court ruling, arbitration award, mediation or agreement between the Parties concerned as unfair (unfair dismissal) or null and void (null and void dismissal).
- Unilateral termination by the Company of the relevant agreement entered into with key personnel in the absence of a breach of contractual obligations.
- Termination of the relevant agreement with Key Personnel due to a material breach by the Company.
- Any other circumstances not defined as bad leaver.
What is bad leaver?
On the other hand, we have the concept of bad leaver. In this case, it refers to termination circumstances that are associated with the professional leaving the company on less favourable terms or due to actions that have compromised the professional’s tenure with the company. This may include resignation without justification or serious breaches of contractual obligations which, by their nature, are detrimental to the partnership or its interests.
The partner or professional may leave because of:
- Breach of exclusivity and permanence obligations.
- Breach of non-competition obligations.
- Voluntary withdrawal of the professional during the term of the exclusivity and permanence obligations.
- Termination of the employment contract or contract for services for any reason that is not considered a good leaver event.
The departure of a key personnel under the good leaver category carries benefits compared to a departure classified as a bad leaver. In a good leaver scenario, the professional will generally retain his or her accrued and potential rights, whereas in a bad leaver situation, he or she is likely to lose all of these rights, but more on these later.
Advantages and disadvantages
Generally, these events are linked to the equity shares or any other type of rights granted in such a transaction.
When a situation arises in which a partner or professional of the company decides to leave the company under the conditions of a good leaver, an agreement will be established that will require such personnel to sell their shares at a more beneficial price for him or her.
An example of a good leaver might be as follows:
In the event of a good leaver event, the founder (and, subsidiarily and successively, the Company) will be entitled to purchase 100% of the departing professional’s unvested shares at their market value at a 25% discount, and the vested shares at their market value at a 10% discount.
However, when a situation arises where key personnel decide to leave the company under the terms of a bad leaver, an arrangement will be put in place that requires such personnel to sell their shares at a price more beneficial to the company in question.
An example of a bad leaver might be as follows:
In the event of a bad leaver event, the Founder (and, subsidiarily and sequentially, the company) shall be entitled to acquire 100% of the unvested shares of the defaulting key personnel at face value and 100% of the vested shares at their market value at a discount rate of 85%, without prejudice to any other compensation for damages to which the Company is entitled to claim pursuant to other provisions of this agreement.
Each contract, agreement and partnership may adjust, expand and define its good leaver and bad leaver events, depending on the activity, the professional, whether it is an investor or a CEO.
Lawyer – Corporate and M&A
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