Am I a bad leaver?

A recent court decision has confirmed that the courts will recognise and require a person to transfer their shares for a nominal amount even if they are worth considerably more than this. Muneeb Dean Head of Corporate asks, Can this be right?

Is this relevant to me?

This is relevant to anybody who owns shares in a private limited company, and also works for that company.

Why is it relevant to me?

This is relevant because it may determine what price you get for your shares in the company if you were ever to leave. For example if you are a bad leaver then it may be that you only get a fraction  of the market value of your shares, or even worse, just the face value (often called the par value ) which often is £1, however can be even less. If on the other hand you are a good leaver, then it is likely that you will get the full market value for your shares.

How will I know if the shares I own are subject to the good leaver/bad leaver provisions?

You need to look in the articles of association of the company, and any shareholders agreement.

What is a bad leaver?

Generally speaking, a bad leaver is an employee of the company or a consultant, who owns shares in the company, and who is removed from their position for a correct and valid reason. This can include because they committed an act of  gross misconduct, fraud, dishonesty, or acted outside of their authority, or against and in breach of a conflict of interest.

What is a good leaver?

A good leaver is generally the exact opposite of a bad leaver, and includes an employee or consultant of the company who owns shares in the company, and is no longer an employee or consultant because of their death ,ill heath,  their retirement, being made redundant, being unfairly or wrongfully dismissed.

What was the case?

The recent decision was in the case of Moxon v Litchfield and others [2013] EWHC 3957 (Ch) in the High Court in London.  The case concerned an action by a shareholder who complained that he was removed incorrectly as a director, treated unfairly, and was now treated as a bad leaver, meaning that he would have to sell his shares for a nominal amount. The judge decided after a three week trial that the person who made the complaint was guilty of gross misconduct, and so came within the definition of a bad leaver. This meant that he must follow the provisions in the shareholders agreement and articles which required him to sell his shares for a nominal value.

What did the judge say?

Whilst it is a very long judgement, the following points made by the judge are of particular interest

  • Whilst the impact of being treated as a bad leaver is harsh, the judge said that the person who brought the claim had agreed to these provisions at the time they entered into the shareholders agreement and the articles of association of the company, which were bespoke and detailed. The drafts of these documents were circulated in advance, and he was given the chance to consider them.
  • In the context of a small company, based on the personal relationships of the various individuals, it is not offensive to have provisions in agreements requiring shareholders to be forced to transfer their shares if they are removed as a director. This is particularly the case if before the transfer of the shares there is a history of paying dividends, since by transferring the shares, that individual does not lose the entire commercial value in the shares.
  • There was no overriding reason not to give effect to the contractual arrangements previously agreed to dismiss a director and transfer their shares. There may be hardship as a result, however this is the effect

What is the impact of the decision in this case?

This decision confirms that if you have a well drafted shareholders agreement with clear provisions relating to good leaver and a bad leaver, then this will help you if a party later seeks to challenge the position through the courts.

On the other hand, if these provisions are loose and allow room for interpretation, then a person may try to challenge them regardless of whether or how they have behaved and acted before then.