Leaver provisions are an essential provision within a company's articles of association through which this can be achieved. On the other hand, these provisions are the most sensitive area for management who want to protect their financial returns, and importantly, recover the value they have created in the business.
What are the key negotiation points when agreeing leaver provisions?
It is crucial to note there is no mandatory market standard that is required to be followed when negotiating the leaver provisions. This means defining what constitutes a ''good leaver'' or a ''bad leaver'' and determining the subsequent handling of their shares following their exit is a matter of negotiation between the parties. Key points to consider during negotiations are:
Types of Leavers
It is common for a company's articles of association to only define a ''bad leaver'' and a ''good leaver''. However, it is important to note that ''very bad leaver'' or ''intermediate leaver'' definitions can also be included. The end result comes down to the negotiating position of the parties involved. Determining the price a leaver is entitled to for their shares will depend on the category they fall in to.
- Bad Leaver / Very Bad Leaver: management will want to ensure that the circumstances in which they could fall into these categories are entirely within their control – e.g. voluntary resignation (within a certain period of time of the initial investment), termination for gross misconduct or dishonesty or committing a breach of any non-compete obligations under the shareholders' agreement. The price payable for the shares in these circumstances would usually be the issue price or £1 in aggregate.
- Good Leaver: a good leaver would receive market value for their shares at the point at which they become a leaver and therefore ordinarily these would apply in circumstances such as permanent ill health, death, retirement, wrongful dismissal or any other circumstance with the consent of the investor.
- Intermediate Leaver: an intermediate leaver may be used to cover any other circumstances in which a person becomes a leaver that do not fit into either the good or bad/very leaver categories. The price payable would ordinarily be determined by reference to a vesting schedule to reflect the value that the shareholder had contributed to the company during the period in which they held their shares.
Handling Leavers Shares
Once the status of the leaver has been confirmed, the next step will be to deal with their shares.
The investor will want to ensure that such shares can be warehoused to be used to incentivise future joiners and this can be achieved by either (a) a transfer to the investor or an employee benefit trust or (b) a company buy back and cancellation of the shares. The investor may also want to be able to cap the leaver's shares at the price determined (as set out above) in the event they are unable to acquire them from the leaver on or around the date in which they become a leaver. The result of this would be that the leaver would keep their shares but they would no longer be entitled to vote or receive dividends on such shares and the price payable to them on a future sale of the company would be capped at the leaver sale price. Management would be reluctant to agree to defer receiving value on their shares in this way.
Management will want to ensure that the leaver shares are ring-fenced for management and would therefore seek to negotiate that either (a) such shares are transferred to existing members of management pro-rata to their existing entitlement or (b) the shares are transferred to an employee benefit trust or bought back by the Company, in each case, on the proviso that such shares are allocated to future members of the management team.
