Edward Starling
- Partner
- Commercial Disputes
Bad buyers and bad leavers: sellers face an imbalanced fight
Bad leaver provisions are a common feature in UK private company M&A transactions, particularly where founders or management shareholders remain involved in the business post-completion of the sale. While these clauses serve a legitimate purpose—protecting the company’s equity value and incentivising long-term commitment—they can, in some cases, be used unfairly to reduce or eliminate payments to departing sellers.
What is a Bad Leaver Clause?
A bad leaver clause typically appears in a shareholders’ agreement, articles of association, or a sale and purchase agreement of shares (SPA). It defines the circumstances in which a departing shareholder must transfer their shares at a discounted price or reduces deferred consideration.
A “bad leaver” is commonly described as someone who:
- Is dismissed for gross or serious misconduct, or serious breach of contract;
- Resigns without notice or without the buyer’s consent;
- Breaches post-termination restrictions (e.g. non-compete or non-solicit clauses).
By contrast, a “good leaver” (e.g. someone leaving due to retirement, illness, or redundancy) is usually entitled to fair market value for their shares or the full deferred consideration. A “good leaver” may also simply be defined as someone who is not a “bad leaver”.
The distinction can have significant financial consequences both as a result of the termination of employment as well as the reduced or forfeited share price or deferred consideration payment. The scope for a buyer to manipulate the circumstances to edge someone into a bad leaver situation is the crux of the negotiation and risk, and is a difficult discussion during the love-in stage of negotiating the transaction.
Bad Leaver Clauses and SPAs
In some transactions, the seller retains shares post-completion and/or agrees to defer part of the consideration, often subject to continued employment or performance. If the seller is later classified as a bad leaver, the buyer may rely on the clause to repurchase those shares at a value that is significantly less than fair value or even for a nominal value (often £1), or to cancel or significantly reduce deferred consideration payments.
Are Bad Leaver Clauses Enforceable?
Yes—provided they are properly drafted. Evidenced in the Supreme Court’s decision in Cavendish v Makdessi [2015], English courts have taken a robust approach to enforcing contractual provisions that serve a legitimate commercial purpose and are not out of proportion to that purpose.
In Lee v Gsquare [2023], the High Court upheld a bad leaver clause that required a departing shareholder to transfer shares for £1 following an alleged breach of restrictive covenants (which rendered the claimant a bad leaver). In this case, the court upheld the clause and rejected arguments that the clause was an unenforceable penalty clause.
What Are the Risks for Sellers?
- Loss of significant equity value or deferred consideration if classified as a bad leaver;
- Limited options and the prospect of a lengthy and costly legal battle with a well-funded buying party or private equity who often also control access to the documentation that is necessary for such a claim;
- Reputational damage associated with being a bad leaver.
How Can Sellers Protect Themselves?
- Negotiate clear and narrow definitions of “bad leaver” and therefore a wider definition of what constitutes a good leaver;
- Include carve-outs for unfair dismissal (including constructive dismissal) or resignation for good reason or after a specific period of time;
- Consider “intermediate leaver” categories of leaver;
- Sellers need to make themselves aware of the implications of a bad leaver determination and how being a bad leaver can be triggered. In particular, sellers need to be extra vigilant that they give no crumbs of a bad leaver argument to the buyer, especially where there is a breakdown in trust. A recent example involved a seller director forwarding a company document to a personal email account for the sole purpose of having access to the documents that were required to defend a bad leaver argument, and where the buyer had explicitly threatened that access to documents would be deliberately removed so that the seller could not defend a future allegation;
- Carefully consider the process of any resignation in line with the employment contract, employment law but also an SPA and shareholders’ agreement.
Industry Trends
The British Private Equity & Venture Capital Association (BVCA) responded to concerns by updating its model documents in 2025. Notably, automatic bad leaver status for resignations has been removed, indicating a shift towards more balanced provisions relating to good and bad leaver provisions. That is welcome for sellers. However, many legacy agreements still contain broad or inflexible bad leaver definitions.
Conclusion
Bad leaver clauses are a legitimate and often necessary part of corporate transactions. However, their misuse or tactical use—though not widespread—can have severe consequences for sellers, including the loss of consideration under an SPA. Early and careful negotiation, supported by experienced legal advice, is essential to ensure that these provisions are fair, proportionate, but also not abused. This can sometimes be a difficult negotiation and is often the first stage of testing what the buyer is going to be like in the short to medium term – “you can trust us” are the words often used as a prelude to a disagreement.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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