Introduction to Leaver Clauses
Leaver clauses are a central instrument in shareholder agreements and employee participation programs, especially for start-ups and companies focused on growth and innovation. They govern what happens to an employee’s or shareholder’s shares when they leave the company. The aim of such provisions is to protect the company from the negative consequences of a sudden or undesired departure and to ensure the stability of the corporation.
In practice, a distinction is made between Good Leaver and Bad Leaver. While Good Leavers leave the company for understandable or unavoidable reasons, such as illness or by mutual agreement, Bad Leavers are those who exit under disadvantageous or culpable circumstances. The specific leaver clauses determine on what terms the shares of the departing employee or shareholder are to be transferred or redeemed. Such clauses are particularly widespread in start-ups and private equity-financed companies, in order to protect the interests of the company and the remaining shareholders.
The consequences of a leaver clause can be significant for the affected employee or shareholder, as they concern the value and transferability of the corporate shares. Therefore, a careful and balanced formulation of these provisions in employee participation programs and shareholder agreements is essential to protect both the interests of the company and the rights of employees and shareholders.
Decision of the Berlin Court of Appeal of 19 May 2025, Case No. 2 U 15/25
With its decision of 19 May 2025, the Berlin Court of Appeal made it clear that a Bad Leaver clause in shareholder agreements is legally questionable and may be invalid if it violates the principle of proportionality (Case No. 2 U 15/25). The legal limits of such provisions are largely defined by current case law, such as decisions from the Higher Regional Court of Munich, which is of central importance for the validity of these clauses.
Leaver clauses are often included in participation agreements for venture capital or start-ups. They govern what happens to a shareholder’s shares when that individual leaves the company, according to the business law firm MTR Legal Rechtsanwälte, which advises, among other areas, on corporate law. Particular requirements must be observed when drafting and formulating such contracts with leaver clauses in order to ensure legally secure regulations.
Good Leaver and Bad Leaver
Generally, a distinction is made between “Good Leaver” and “Bad Leaver”. Good Leavers leave the company for understandable or unavoidable reasons, e.g., due to illness, mutual agreement, or voluntary resignation. This is usually unproblematic because in such cases the contracts typically provide for fair compensation for the shares, often at market value.
Bad Leavers, on the other hand, are shareholders who leave the company under disadvantageous or culpable circumstances, for example due to serious breaches of duty or contractual violations. In their case, significantly stricter regulations often apply: Upon leaving, their shares are frequently compensated at well below market value, sometimes at only the nominal value, or even forfeited entirely without compensation. A typical consequence for the person affected is the complete or partial loss of entitlement to company shares. Thus, Bad Leaver clauses involve considerable potential for conflict.
Minority shareholders can also be affected by such regulations.
Vesting Agreements
Vesting agreements are an essential element of modern employee participation programs and shareholder agreements. They define how and when an employee or shareholder actually acquires shares in a company. The purpose of these provisions is to strengthen the commitment to the company and to ensure the long-term motivation of employees and shareholders.
Usually, the shares are not assigned immediately, but rather over a certain period of time – the so-called vesting period. Only after this period has expired or upon reaching certain milestones do the shares fully vest to the employee or shareholder. Vesting agreements are particularly common in start-ups and growth-oriented companies, as they ensure that key individuals remain with the company and continuously contribute their performance.
The specific design of vesting can vary depending on the company, industry, and individual agreement. In any case, vesting agreements are an important component of shareholder agreements to align the interests of all parties involved – company, shareholders, and employees – and to promote sustainable corporate development.
Time-Based Vesting
Time-based vesting is the most commonly used form of vesting agreement in companies and start-ups. In this case, an employee’s or shareholder’s shares are allocated in regular installments over a fixed vesting period. This means the employee or shareholder does not receive the shares immediately, but rather gradually over time.
A common model is so-called cliff vesting: Only after a certain initial period – the “cliff” – are the first shares transferred at once. Thereafter, the remaining shares are allocated in equal installments, which is referred to as graded vesting. This rule ensures that employees and shareholders have an incentive to remain loyal to the company for a longer period and to continue providing their performance.
Time-based vesting offers companies and shareholders the assurance that important key individuals will not leave at short notice while retaining their shares. At the same time, employees benefit from being able to participate in the company’s success through their long-term commitment. Thus, time-based vesting significantly contributes to motivation and loyalty within the company.
Breach of Duty Leads to Loss of Shares
In the underlying case, the Berlin Court of Appeal also had to decide on the validity of a Bad Leaver clause. Here, a founder-shareholder was simultaneously a managing director of the company, who bore special responsibility as part of the management. The underlying shareholder agreement included a Bad Leaver clause, according to which, upon dismissal as managing director due to a breach of duty, he automatically had to transfer all his shares at a symbolic price – the nominal value. The clause applied for an unlimited period and did not differentiate according to the type or severity of the misconduct. As a result, any reason for dismissal qualifying as a “breach of duty” triggered the complete loss of shares, which significantly impacted the affected person’s capital. This applied even if the conduct was merely negligent or the breach minor.
Berlin Court of Appeal: Clause is Disproportionate
The Berlin Court of Appeal declared the clause disproportionate and thus invalid. It justified its decision by stating that a complete and permanent loss of shareholder status constitutes a particularly intense interference with property rights. Such interference must be objectively justified and proportionate. That was not the case here, according to the court. The case law, especially by the Higher Regional Court of Munich, clearly demonstrates the legal limitations of such provisions and emphasizes the need for clear requirements in contract wording, in order to safeguard the meaning and purpose of the ban on expulsion.
The exclusion of a shareholder against their will must always remain the last resort, the court emphasized. The involuntary loss of shareholder status is therefore generally only permissible for a sufficiently substantial factual reason, e.g., a persistent and serious breach of shareholder duties, a severe violation of a contractual non-competition clause, or a profound conflict among shareholders that is predominantly the fault of the shareholder to be excluded. The mere dismissal as shareholder-managing director and termination of the managing director’s service contract are not sufficient grounds, according to the court.
Sword of Damocles Hanging Over Shareholders
The court specifically criticized the fact that the clause made no differentiation, but treated all breaches of duty the same. There were no graduated responses, such as the option to remove only the office of managing director without simultaneously revoking participation in the company. The court also regarded the unlimited duration of the clause as problematic. This places a permanent Sword of Damocles over shareholders, who risk losing all their shares under certain circumstances.
Although Bad Leaver clauses are often used, they are only permissible within certain limits, as illustrated by the Berlin Court of Appeal’s decision. Courts in particular examine whether the consequences for the affected shareholder are reasonably proportionate to their misconduct. A clause may also be problematic if it is of unlimited duration. Achieving a balanced regulation of such clauses is a special challenge, as they must take into account the interests of all parties involved and the boundaries of permissible contract design.
Careful Contract Drafting
Anyone incorporating leaver clauses in shareholder agreements should therefore carefully weigh the legitimate interests of the company against the protection of shareholder rights. Particularly the importance of clear contractual provisions must not be underestimated. It is advisable to limit Bad Leaver clauses in time, e.g., to the duration of a vesting period. Furthermore, a graduated legal consequence should be stipulated, depending on the severity of the misconduct. The trigger for applying the clause must also be clear, objectively justified, and legally reviewable. Even though the principle of freedom of contract generally applies and collateral agreements may be made, proportionality must be maintained. Only in this way can conflicts be avoided and the effectiveness of such provisions ensured.
MTR Legal Rechtsanwälte advise on contract drafting, shareholder disputes, and other topics in corporate law. Precise wording and compliance with legal requirements are of central importance in contract drafting to ensure legal certainty.
Feel free to contact us!
