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Address bad leavers, good leavers in shareholder agreement

Dec 7, 2020 | Business Disputes

Many people play important roles in business operations. In particular, shareholders can often have considerable sway in what happens with a Florida business, especially if a small company’s shareholders and directors are the same. Of course, not all shareholders will want or be able to remain with a company for life, so it is important to use a shareholder agreement to address what should happen to shares if a person leaves.

This type of agreement can address many important details regarding shareholder and company interactions. Because shares are essential to a company, remaining shareholders want to have the leaving party’s shares back. Typically, this can involve buying back the shares from the exiting shareholder, but the amount paid for the shares can depend on certain factors. For example, detailing in the agreement how to handle a good leaver or a bad leaver is wise.

A bad leaver is generally a shareholder who chooses to leave the company or is pushed out by other shareholders due to unfavorable actions, such as leaving to join a competing company. In such a case, remaining shareholders likely do not want to provide a significant value to the shares they want back. However, with a good leaver, the shareholder is exiting the company due to retirement, illness or other legitimate reasons for no longer being able to participate. As a result, a good leaver typically warrants a fair payment for their shares.

Buying back shares from leaving shareholders can certainly be tricky, which is why it is important to explain how good leavers and bad leavers will be addressed as part of the shareholder agreement. These terms can ensure that the shareholders know what to expect should they choose to leave the company and how the circumstances surrounding their leaving could affect their payout for shares. Discussing this particular subject with experienced Florida business law attorneys may be prudent.