Good and Bad Leaver Provisions Explained: Essential Guidance for Australian Businesses

Contents

Understanding Good and Bad Leaver Provisions: Essential Guidance for Australian Businesses

Introduction

In today’s competitive business environment, having clear contractual terms in your shareholder or employment agreements is critical. One important area many companies overlook is the inclusion of leaver provisions – clauses that determine how shares or equity options are treated when an employee leaves the company. Whether you are a start-up or an established business, understanding the distinction between good leaver and bad leaver provisions can help protect your organisation, safeguard shareholder interests, and promote a fair working culture.

These provisions bring clarity to difficult situations such as resignations, redundancies, retirements, or even employee misconduct. In this guide, we will explore what constitutes good and bad leaver events, explain why these distinctions are so important, and offer practical advice on incorporating clear and fair leaver clauses into your agreements. We’ll also discuss regulatory aspects relevant to Australian businesses.

What Are Leaver Provisions?

Leaver provisions are contractual clauses typically found in shareholder agreements or employment contracts. They outline the consequences for shareholders or employees upon their departure from the company. Essentially, these clauses are designed to determine if a departing party is treated as a good leaver or a bad leaver.

A good leaver is someone who leaves the business under circumstances that are generally viewed as favourable and beyond their control, such as retirement, illness, redundancy, or even in some instances voluntary resignation on amicable terms. On the other hand, a bad leaver is generally someone who exits under conditions of misconduct, breach of contract, or other unfavourable circumstances. For many organisations, such clarity is vital in maintaining trust among shareholders and protecting the company’s future.

Having robust leaver provisions also complements other critical agreements – much like what makes a contract legally binding or ensuring you understand what a contract is. These elements together support a strong governance framework.

Good Leaver Provisions

Good leaver provisions are designed to provide fair treatment to departing employees or shareholders when their exit is for reasons outside of their control. These provisions aim to reward and respect those who have contributed positively to the business, even if they eventually need to leave.

Definition of a Good Leaver

A good leaver is typically defined as an individual who departs due to factors such as:

Retirement – leaving the company after a long period of service and at a time when the employee reaches retirement age.
Illness or Injury – departures due to health issues that impact the ability to continue working.
Redundancy – when an employee is let go because the company has reduced staff numbers for business reasons.
Unfair or Constructive Dismissal – situations where an employee is forced to leave due to inadequate working conditions or dismissal without sufficient cause.
Death – in which case the shares or vested options typically pass onto the employee’s estate as outlined in the shareholder agreement.

In these circumstances, the departing party is usually allowed to retain their vested equity or share options. The goal is to ensure that those who have contributed positively are not unduly penalised if they must leave under circumstances beyond their control.

Good leaver provisions help foster goodwill within the organisation and enhance your employer brand. They can act as an assurance for prospective employees that even if they need to exit the company in the future, they will be treated with fairness and respect.

Benefits of Good Leaver Provisions

The benefits of including good leaver clauses in your agreements include:

Retention of Value: Departing employees retain their accrued equity, providing them with a financial benefit and a safety net.
Enhanced Reputation: Fair treatment underlines the company’s respect for its employees and can contribute to a positive corporate culture.
Clear Guidelines: With unambiguous provisions in place, both the company and its employees understand the consequences of departure under various circumstances.
Business Stability: The retention of vested equity for good leavers ensures that the ownership structure remains stable and reflects past contributions.

Bad Leaver Provisions

In contrast to good leaver provisions, bad leaver clauses are structured to protect the company’s interests when an individual leaves under unfavourable conditions.

Definition of a Bad Leaver

A bad leaver is generally someone who exits the company due to reasons such as:

Misconduct – including breaches of company policies or actions that tarnish the company’s reputation.
Breach of Contract – for instance, failing to adhere to agreed non-compete or confidentiality clauses. It’s advisable to have provisions that reference a non-compete agreement to clearly outline these obligations.
Joining a Competitor – leaving the company to work directly with a competitor, which may compromise proprietary information or trade secrets.
Gross Misconduct – serious offences, such as fraud or other criminal activities, which directly harm the business.

Under bad leaver provisions, the departing party may be required to forfeit their vested (and sometimes unvested) equity or be compelled to sell back their shares at a nominal or significantly discounted price. This mechanism protects the company’s interests and serves as a deterrent against actions that might undermine the organisation.

Implications of Being a Bad Leaver

The implications of being designated as a bad leaver can be far-reaching. Often, a bad leaver will lose the financial benefits associated with their shares or options, and may even be contractually obliged to return them to the company. This distinction is crucial because it:

Encourages ethical behaviour and adherence to contract terms.
Protects the company from individuals who might otherwise profit from actions detrimental to the business.
Helps maintain shareholder value and organisational stability, ensuring that equity remains with those whose interests are aligned with the long-term health of the business.

It is important to note that the specifics of what constitutes a bad leaver, and the remedies available, should be clearly outlined in the shareholder or employment contract. In many cases, companies also implement strict employment contracts that detail the expectations and consequences for all parties – a key aspect of maintaining professional standards.

The Importance of Clear Definitions in Shareholder Agreements

One of the most common sources of dispute in exit scenarios is the lack of clear definitions within the shareholder or employment agreement. When employees or shareholders depart, ambiguity over what constitutes a good or bad leaver can lead to costly litigation and strained relationships.

By clearly outlining the conditions that define each category, companies can mitigate the risk of disputes. For instance, defining a good leaver to include cases of redundancy or retirement, while explicitly detailing the actions that qualify someone as a bad leaver, provides transparency and a basis for fair treatment. This precision parallels the principles outlined in our guide on what makes a contract legally binding—the clearer the terms, the more secure the agreement.

Including comprehensive leaver provisions not only reduces the likelihood of internal conflicts but also supports the broader governance framework of an organisation. It is essential that these definitions are regularly reviewed and updated in consultation with legal professionals to ensure they remain practical and enforceable.

Best Practices for Drafting Leaver Clauses

Developing well-drafted leaver clauses is both an art and a science. Here are some best practices to help you create provisions that are fair, enforceable, and aligned with your business interests:

Consult with Legal Experts:
Ensure you seek legal advice when drafting these clauses. An experienced lawyer can help tailor the language to your specific scenario, much like how you would consider what is a contract to ensure all elements are legally valid.
Be Specific and Detailed:
Avoid ambiguous language. Clearly outline which scenarios qualify as good or bad leaver events – from retirement and redundancy to misconduct and breach of non-compete clauses. Specificity is crucial for reducing disputes.
Align with Regulatory Requirements:
In Australia, it is important to ensure your agreements comply with both the Corporations Act and relevant industry standards. For further guidance, you can refer to resources provided by the Australian Securities and Investments Commission (ASIC) and the Fair Work Commission.
Consider the Impact on Employee Entitlements:
Leaver provisions should work hand-in-hand with other contractual terms such as redundancy entitlements and employment conditions. This ensures that all aspects of a departure are managed fairly.
Regularly Review and Update:
As circumstances evolve – whether due to changes in legislation, market conditions, or internal organisational changes – it is important to update your agreements accordingly.

Following these best practices not only secures your business interests but also builds trust among employees and shareholders. Moreover, it reinforces that the process is fair and transparent from the outset.

Key Considerations for Australian Businesses

For Australian businesses, several additional factors need to be considered when implementing leaver provisions:

Compliance with Australian Law:
Always ensure that your agreements respect local laws and regulations. The legal landscape in Australia requires that contractual provisions are fair and equitable to all parties involved.
Impact on Business Culture:
Clear leaver provisions can be a positive signal to both current and prospective employees. They demonstrate that your company values fairness and transparency, which can help with registering your business as a reputable organisation.
Investor and Shareholder Confidence:
Strong governance structures that include well-defined leaver clauses not only protect the company but also build investor confidence. Shareholders are more likely to invest in companies with clear mechanisms for dealing with departures.
Integration with Other Contractual Terms:
Leaver provisions should not exist in isolation. They must be integrated with employment contracts, shareholder agreements, and even non-compete or confidentiality clauses. For example, many companies tie their approach to bad leaver events to breaches of a non-compete agreement, highlighting the interconnectivity of these contractual elements.

Additionally, understanding the market and the particular needs of your business will help tailor these provisions effectively. Keeping abreast of industry developments and changes in legislation is a continuous process that contributes to long-term business stability.

It is also worth noting that robust leaver clauses serve as a reminder of the importance of proper employment contracts. Being clear about expectations and outcomes for all parties involved can reduce misunderstandings and lay the foundation for a positive exit process.

Conclusion and Key Takeaways

Good leaver provisions ensure departing employees or shareholders receive fair treatment and retain valuable equity in circumstances such as retirement, illness, or redundancy.
Bad leaver clauses protect the company by penalising those who exit due to misconduct or breach of contractual obligations, often requiring them to forfeit their equity.
Clear and specific definitions within your shareholder or employment agreements are vital to avoid disputes and maintain trust among stakeholders.
Integrating leaver provisions with other contractual terms — such as non-compete agreement clauses and redundancy entitlements — reinforces your organisation’s governance framework.
Regularly reviewing and updating these clauses in line with Australian legal standards and your business needs is essential for long-term success.
Developing strong contracts, as discussed in guides like what makes a contract legally binding and what is a contract, lays the foundation for clear leaver provisions.

The process of setting up clear, enforceable leaver provisions might seem complex, but it is a critical element of good corporate governance. By taking the time to tailor these clauses to your specific business needs and consulting with experienced legal professionals, you are investing in the long-term stability and reputation of your company. Whether you are drafting a shareholder agreement or updating an existing employment contract, remember that clarity and fairness are key.

If you would like a consultation on leaver provisions, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Alex Solo

Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.

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