Key points
- The bad leaver clause (clause de mauvais partant) penalises a shareholder who leaves the company in circumstances considered unfavourable.
- It provides for a significant reduction in the sale price of their shares in the event of serious misconduct.
- The triggering criteria, defined in the shareholders’ agreement, include unjustified resignation, removal for serious misconduct and unfair competition.
- The financial consequences, set by the agreement, can range from a discount on the sale price to a buy-back of the shares at their nominal value.
- Conversely, the good leaver clause provides for a price based on market value for a legitimate departure (retirement, illness, death).
- For the clause to be valid, it needs clear terms, must be set out in the articles of association or the shareholders’ agreement, and must comply with the French Civil Code (Code civil) and the French Commercial Code (Code de commerce).
Do you have fellow shareholders in your company and fear a harmful departure? A bad leaver clause can help you limit the financial consequences of such a departure. When a shareholder leaves abruptly or acts disloyally, the impact on the company can be heavy. The other shareholders are exposed to unforeseen losses, or even internal conflicts. You are looking for concrete ways to protect your interests and keep a calm dynamic within the company.
So you want to understand how a bad leaver clause works, its triggering criteria and its financial impact. You need clear solutions to anticipate these situations without ambiguity. We give you precise explanations and recommendations to avoid disputes. Adopt sound legal practices to protect your company against problematic departures.
What is a bad leaver clause?
A bad leaver clause (clause de mauvais partant) is a contractual provision designed to penalise a shareholder who leaves the company in circumstances considered unfavourable or inappropriate for the business. It stipulates that in certain specific situations, such as serious misconduct, the sale price of their shares is significantly reduced.
The main purpose of this clause is to protect the company and the other shareholders against harmful or disloyal behaviour. For example, if a shareholder abruptly abandons their position or commits fraud, they may be classed as a bad leaver and see their financial rights reduced under the conditions set by the clause.
How a bad leaver clause typically works
Triggering criteria
For a shareholder to be treated as a bad leaver, certain conditions must be met. These criteria are generally well defined in the shareholders’ agreement and may include:
- Unjustified resignation before a specified date.
- Removal for serious misconduct.
- Departure following acts of unfair competition.
Financial consequences
The financial consequences for the bad leaver can be severe. The clause often provides that the amount paid for the buy-back of their shares will be lower than their actual market value. This can take the form of:
- Buy-back at nominal value, meaning without taking into account the company’s current valuation.
- A substantial reduction in the sale price compared with market value, according to a discount set by the agreement.
These measures aim to deter harmful behaviour and to compensate for any damage suffered by the company.
Good leaver vs bad leaver: the differences
Unlike the bad leaver clause, the good leaver clause provides more favourable terms for a shareholder’s departure. A good leaver generally leaves the company for reasons considered legitimate, such as retirement, a disabling illness or a departure agreed with the other shareholders. In these cases, the sale price of the shares is often based on market value.
What scenarios apply to good leavers?
Common “good leaver” cases may include:
- Retirement
- Death or disability
- Departure agreed with the other shareholders
These precise conditions help maintain a climate of trust while supporting an orderly transition for the company.
Is a bad leaver clause valid under French law?
To ensure the legal validity of these clauses, several points should be taken into account. The terms must be clearly defined to avoid any ambiguity. The clause must respect the binding force of contracts (Article 1103 of the Civil Code (in French)) and the requirement of good faith (Article 1104 of the Civil Code (in French)). If the price is disputed, the expert appointed under Article 1843-4 of the Civil Code (in French) applies the valuation rules set by the articles of association or by the agreement binding the parties.
Following good practice
Some key points concern:
- Clear and precise drafting of the terms relating to serious misconduct and inappropriate behaviour.
- Inclusion of this clause in the articles of association or in a shareholders’ agreement signed by each shareholder concerned: the agreement creates obligations only between its parties (Article 1199 of the Civil Code (in French)).
Taking advice from a lawyer helps you anticipate the various situations envisaged and provide the necessary safeguards.
Practical examples of bad leaver clauses
Illustrating with concrete examples helps you better understand how these clauses work in practice.
| Scenario | Actions resulting in bad leaver status | Financial penalties |
|---|---|---|
| Unexpected resignation | A shareholder resigns without respecting the notice period set by the agreement | Sale price discounted compared with market value |
| Fraudulent behaviour | Proven fraud causing losses for the company | Shares bought back at nominal value |
| Unfair competition | Setting up a competing business without prior agreement | Sale price drastically reduced |
Preventing disputes over bad leaver clauses
Even when well drafted, a bad leaver clause can lead to conflict. To minimise this risk, adopting certain practices makes it easier to manage and prevent disputes:
Communication and transparency
Open communication with all the shareholders is essential. Each shareholder then knows what is at stake and the potential risks. Regular training and information on obligations and duties also help ease tensions.
Providing for remedies
It is better to provide for amicable dispute resolution mechanisms before disagreements turn into long and costly court battles. Other clauses in the agreement, such as the ratchet clause, which protects investors against dilution, call for the same care in drafting.
The importance of legal support
The expertise of a corporate lawyer often proves essential. In particular, the lawyer makes sure that:
- The clauses comply with the regulations in force.
- The interests of each party are protected.
- The penalties provided for are proportionate and fairly applicable.
Prevention rather than cure remains the key to managing relations between shareholders as well as possible and ensuring the company’s long-term future.
Anticipating and drafting clear, balanced clauses avoids unpleasant surprises. Although strict, the bad leaver clause plays a necessary protective role for companies, maintaining a high level of security and peace of mind among the shareholders.
