Bad leaver provisions are an integral part of many shareholder agreements, especially in companies with multiple shareholders or international joint ventures. But when does a shareholder really qualify as a bad leaver? And how strictly should you interpret such a provision? The judgment of the Court of Appeal of The Hague of 28 March 2023 (ECLI:NL:GHDHA:2023:961) offers valuable insights for companies and institutions operating in the Netherlands and abroad. In this article, you will read what this judgment means for the practice of contract law and shareholding disputes.
What is a bad leaver provision?
A bad leaver provision regulates that a shareholder who leaves under certain (usually culpable) circumstances must offer his shares to the other shareholders at a lower price - often the nominal value. This is in contrast to a good leaver, who is entitled to the market value of his shares upon departure. The aim is to discourage undesirable behaviour and ensure the continuity of the company.
The case study: termination of management agreement and bad leaver discussion
In this case, a shareholder, through her holding company, had a management agreement with the operating company. After this agreement was terminated due to lack of employee support, the company claimed transfer of the shares at nominal value, relying on the bad leaver provision in the shareholders' agreement.
The shareholder argued that there was no bad leaver situation because the management agreement had not been dissolved but terminated. According to her, the sanction of bad leaver was too severe and the provision had to be interpreted strictly.
Legal considerations: interpretation of the bad leaver provision
The court had to assess whether the end of the management agreement by termination due to lack of support was equivalent to a bad leaver situation as referred to in the agreement. The text of the provision spoke of "termination" of the agreement due to lack of support.
The court applied the Haviltex standard. This means that not only the literal text is decisive, but also what the parties could reasonably expect from each other. In doing so, the court looked at, among other things:
- The central role of ending involvement in the company in the provision.
- The fact that other bad leaver grounds did not require dissolution but could include termination.
- The language imperfections in the agreement.
- The lack of legal assistance in drafting the agreement.
The court concluded that terminating the management agreement for lack of support - whether by termination or dissolution - results in a bad leaver situation. The company was therefore allowed to interpret this provision to mean that even in the event of termination for lack of support, the shares had to be offered at nominal value.
Practical lessons for practice
This ruling underlines the importance of clear and balanced contractual provisions. In practice, we often see shareholder agreements containing standard provisions, without sufficient attention to the specific situation of the company. This can lead to unintended and far-reaching consequences in the event of a dispute.
Key areas of focus:
- Formulate bad leaver provisions as concretely as possible. Clearly state which situations are covered and the consequences.
- Pay attention to the method of termination. Make explicit whether both termination and dissolution can lead to bad leaver status.
- Take into account the Haviltex standard. The interpretation of contracts depends not only on the text, but also on the intention of the parties and the circumstances of the case.
- Provide legal guidance when drafting shareholder agreements. This prevents ambiguity and lengthy proceedings.
Example from practice
In this case, the management agreement was terminated for lack of support. The shareholder disputed that this led to a bad leaver situation, but the court held that the intention of the parties was that any termination for lack of support - regardless of the legal form - leads to bad leaver. As a result, the shareholder had to transfer her shares at nominal value, a significant financial difference compared to market value.
Conclusion: be alert to the consequences of bad leaver provisions
The judgment of the Court of Appeal of The Hague shows that the interpretation of bad leaver provisions in shareholder agreements depends not only on the literal text, but especially on the intention of the parties and the context. For your company, this means that when drafting or reviewing such provisions, you should pay close attention to the wording and the possible consequences in case of a dispute.
More information.
Want to know more about bad leaver provisions, drafting shareholder agreements or have a dispute about the interpretation of contracts? Feel free to contact our firm. We advise and litigate for companies and institutions at home and abroad and provide clear, practical solutions to complex contractual issues.
