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Protecting your business when key employees become shareholders: Good leaver and bad leaver provisions
November 3, 2026
For many growing businesses, issuing shares to key employees can be an effective way to incentivise performance and retain talent. However, founders often focus on the benefits of employee ownership without giving sufficient thought to what should happen if those employees later leave the business.
This is where good leaver and bad leaver provisions become important. Commonly included in a company’s articles of association and/or shareholders’ agreement, these provisions help ensure that a company’s ownership structure remains appropriate as personnel changes occur.
Our expert, Emily, outlines the importance of the provisions and how they protect a business when an employee shareholder leaves.
Good leaver and bad leaver provisions govern the position of employee shareholders when they are no longer involved with the business.
Typically, the provisions require a departing employee to offer their shares for sale; usually either to the founders or to the company. The price payable for those shares usually depends on the circumstances of their departure.
A “good leaver” is often defined as someone who leaves because of ill health, disability, death, redundancy or another reason approved by the board or the majority of shareholders. By contrast, a “bad leaver” commonly includes an employee who resigns after a relatively short period, is dismissed for gross misconduct or otherwise leaves in circumstances regarded as detrimental to the company.
The precise definitions will vary between businesses and should be carefully tailored to the company’s objectives and circumstances.
A common misconception is that an employee’s shares automatically cease to be held by them when their employment comes to an end. In reality, unless appropriate transfer provisions are included in the company’s articles of association or a shareholders’ agreement, a former employee who has been issued shares will continue to hold such shares, and the rights attached to them, after leaving the business.
This can create a number of practical difficulties for the business. Depending on the rights attaching to the shares, former employees may continue to receive company information, attend and vote at shareholder meetings and receive dividends, despite no longer contributing to the growth or success of the business.
Good leaver and bad leaver provisions help ensure that ownership remains in the hands of those actively involved in the company and can enable shares to be recycled to future employees or management.
Leaver provisions also allow businesses to distinguish between different types of departure.
Many founders consider it unfair for an employee who has helped build the business over many years to be treated in the same way as an employee who leaves after a short period or is dismissed for misconduct. Leaver provisions can reflect this distinction.
For example, a good leaver may be entitled to receive full market value for their shares, whereas a bad leaver may receive a discounted price or, in some circumstances, only the amount they originally paid for the shares. The ability to differentiate between these outcomes can help create a fairer and more commercially sensible result.
Prospective investors will expect companies to have robust leaver provisions in place – they will want reassurance that shares held by departing employees can be recovered and reallocated if necessary.
Poorly drafted provisions can become a point of concern during investment rounds, acquisitions or other corporate transactions. In some cases, these issues can delay deals or lead to lengthy negotiations over ownership and control.
Disputes frequently arise where definitions are unclear or where directors are given broad discretionary powers without appropriate safeguards.
Common areas of dispute include:
When drafting leaver provisions in articles and/or shareholders’ agreements, founders should consider:
Issuing shares to key employees can be an excellent way to reward commitment and support growth. However, founders should give equal consideration to what happens when an employee shareholder leaves the business.
Well-drafted good leaver and bad leaver provisions can protect the company’s ownership structure, provide certainty for shareholders and reduce the likelihood of costly disputes. For most growing businesses, investing time in putting appropriate provisions in place at the outset is far more effective than trying to resolve issues after a key employee has departed.
Seeking professional support will ensure your business is safeguarded in the event of a departure of a shareholder.
For bespoke advice and support when it comes to drafting and optimising your articles of association and shareholder agreements or issuing shares, get in touch with a member of our team on 02920 829 100 or via hello@darwingray.com to see how we can support you and your business.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
