Good leaver / bad leaver

Definition

This clause is signed in every deal with management equity and in 90% of cases only really read when it gets triggered: typically years later, in an emotionally charged termination. That's the wrong sequence. The gap between good-leaver fair market value and the bad-leaver penalty price is in our experience an average of 60 to 85% of portfolio value. For a manager with €400k of vested shares, that's the difference between €280k and €50k.

Belgian and Dutch practice differs on one doctrinal point but converges on outcome. In Belgium it sits fully under contract freedom of the Civil Code: no specific statutory protection for equity-holding employees. Dutch courts apply reasonableness and fairness (Art. 6:248 BW) slightly more actively; an extreme disproportionate bad-leaver mechanism that strikes at the essence of the right to free termination can be moderated, but that's rare: typically carefully drafted clauses work as written.

Leaver categories sit in well-drafted SPAs as follows: good leaver covers death, long-term disability (typically >6 months), retirement at statutory age, and dismissal by the employer without cause. Bad leaver covers voluntary resignation within vesting, dismissal for cause, fraud, and usually material breach of the shareholders' agreement (competition, confidentiality). A third category: "intermediate" or "neutral leaver": covers situations like mutual termination or unexpected restructuring; these typically land midway between good and bad.

Vesting determines what's even vested to claim as a good leaver. Benelux MBO standard: 4 years linear with a 1-year cliff, or 3 years linear without a cliff. Once vested, leaver rules apply to that vested portion; unvested shares are repurchased at acquisition cost regardless of leaver type. Pricing for good leavers is typically "fair market value": and that's where the snag is: how is that determined? Three standard routes: (a) external valuation by an independent valuator at departure date (fair, but €15-30k cost and 4-6 weeks), (b) a PE-defined formula (typically last audited EBITDA × agreed multiple: manipulable by the buyer), or (c) a hybrid with formula + cap/floor to avoid outliers.

Worked example

An Eindhoven scale-up ran an MBO where the CTO acquired 8% under 4-year vesting with a 1-year cliff. After 2.5 years the relationship with the CEO became unworkable; he resigned. The SPA classified "voluntary resignation within 5 years post-MBO" as bad leaver with a buyback price equal to 30% of fair market value at departure date. Vested portion = 62.5% of his 8% = 5%. Business value at departure estimated at €18m. Good-leaver value = €900k; bad-leaver value = €270k. Result: €630k difference. The CTO could have avoided the bad-leaver classification by waiting four months for a mutual termination agreement: effectively an expensive lesson in patience.

When it matters

In every MBO, partner structure, or co-investment situation where management or key people receive equity. Three negotiation points deserve attention before signing: (1) clear definition of mutual vs voluntary termination (what exactly counts as "cause"?), (2) pricing mechanic for good leavers (prefer external valuation over formula where possible), (3) an explicit acceleration trigger for unvested shares on death or disability: otherwise the heir receives only acquisition cost on the unvested portion.

Frequently asked

Which events typically qualify as good leaver?

Death, long-term disability (>6 months), statutory-age retirement, and employer-initiated dismissal without cause. Some SPAs add mutual agreement and redundancy. The precise list sits in the shareholders' agreement and is fully negotiable.

How is "fair market value" for good leavers determined?

Three standard paths: external valuation by an independent valuator (fair, costlier, weeks of delay), a fixed formula on EBITDA × multiple (fast, manipulable), or a hybrid. PE investors typically push for formulas; selling owners prefer external valuations. Negotiate this before signing, not after.

What happens to unvested shares on departure?

Standard practice: repurchased at the original acquisition cost (often nominal) regardless of leaver type. On death or disability some clauses include "acceleration" that vests all unvested shares immediately: ask for this explicitly in SPA negotiation.

Is a Belgian bad-leaver clause enforceable if it applies a 90% discount?

In principle yes: contract freedom prevails. But 90% discount draws judicial scrutiny; in extreme cases a bad-leaver provision can be moderated on abuse-of-rights grounds. Practically: 70-80% discount is safe within Benelux market norms; beyond opens procedural risk.