What Are Bad Leaver Provisions in Articles of Association?

If you’re leaving a company on bad terms, a bad leaver provision in the Articles of Association or your shareholder agreement could mean you’re paid a fraction of what your shares are actually worth.

Leaving on bad terms might seem unlikely, but it could leave you with a significant undervaluation of your shareholding and exit terms that are hard to challenge. This article considers bad leaver provisions and how you can overcome them.

We act for directors of private limited companies and minority shareholders in England and Wales. If you’re concerned about bad leaver clauses or already in dispute over your exit terms, contact our specialist commercial litigation solicitors. Our commercial litigation team have decades of experience acting in a range of commercial disputes involving shareholders, work nationally, and would love to help you.

Key Takeaways

• The Articles of Association or a shareholders’ agreement can control what happens when a member leaves on bad terms.
• There is no standard definition of bad leaver provisions.
• Bad leaver provisions may be added to the articles using a special resolution.
• They can compel a share transfer at a heavily discounted rate against a fair market value.
• There are various legal grounds to challenge bad leaver provisions before or after departure.

What Bad Leaver Provisions Actually Do

Bad leaver provisions regulate what happens when you leave a company under less than favourable circumstances. Misconduct or dismissal has no effect on share ownership.

One of the key aspects of these provisions is that they can compel a shareholder to transfer their shares. This can’t happen without specific provisions in either the shareholder agreement or the company’s Articles of Association.

Why These Clauses Are Turning Up in Articles of Association, Not Shareholders’ Agreements

Including bad leaver clauses in the Articles of Association provides stronger protection for the company and its shareholders than a shareholders’ agreement alone, which may offer more limited remedies if a departing member tries to sell or transfer their shares.

Good Leaver, Bad Leaver, and the Difference in Share Value

Exiting the company as a bad leaver is likely to mean your shares are valued at less than fair market value. Whether that’s the outcome depends heavily on how your Articles of Association and any shareholders’ agreement are drafted to affect valuation.

The difference in share price between a good leaver and a bad leaver can be significant:

• A significant fixed discount on fair value, sometimes reducing it to the nominal value of the share, which is typically £1 per share. 
• Performance-related bonuses removed entirely

How a Company Can Amend Its Articles to Add Leaver Provisions

The Special Resolution Threshold

A company can only add leaver provisions by the approval of a special resolution, which must be passed by at least 75% of the votes cast by the voting membership.

Why a 75% Majority Can Bind a Minority Shareholder

A 75% majority can bind a minority shareholder because most changes to the Articles only require a special resolution, not unanimous consent.

A shareholder will need more than 25% to block special resolutions that change the Articles of Association.

When Bad Leaver Provisions Can Be Challenged

Unfair Prejudice Petitions Under the Companies Act 2006

Depending on the precise circumstances, the nature of the provision and its enforcement, you may be able to challenge a bad leaver clause as part of a claim for unfair prejudice under Section 994 of the Companies Act 2006.

Unconscionable Bargains and Lack of Advice

In English law, an unconscionable bargain is a transaction that is so oppressive or unfair that it amounts to exploitation. You must be able to demonstrate a serious disadvantage which may involve a lack of advice, and that this weakness has been exploited, but it is very difficult to challenge any transaction on this basis

Procedural and Drafting Failures

A badly drafted provision may not be legally enforceable and could be open to challenge.. Equally, you may be able to object if there are errors in how the provision was added to company governance.

Not every challenge succeeds. Courts have discretion, and the outcome often turns on how the provision was drafted and adopted in the first place. A well-drafted, properly approved clause is harder to unwind than a rushed one, which is why an early, honest assessment of your position matters more than optimism.

What to Do Before You Sign or Accept a Bad Leaver Valuation

Take legal advice before you agree to anything. A specialist solicitor can explain the options that may be available to you other than accepting the valuation and potentially negotiate better terms.

If you have a strong case, cost doesn’t have to be the barrier to challenging a bad leaver valuation. We act on a Conditional Fee Arrangement or Damages-Based Agreement for qualifying disputes, meaning we share the risk with you rather than asking you to fund a challenge alone. Subject to case assessment and our funding criteria. Available on qualifying disputes typically valued over £10,000 with strong prospects of success.

Frequently Asked Questions

Can a Company Change Its Articles Without Shareholder Agreement?

A company can only change its Articles of Association by special resolution, requiring at least 75% of votes cast by the voting membership, though the articles may set an even higher threshold for specific changes.

What Is the Difference Between a Good Leaver and a Bad Leaver?

A good leaver departs amicably and retains fair value for their shares. A bad leaver exits under adverse circumstances and may be compelled to sell at a significantly discounted rate with staged payments. There’s no standard definition of either term.

Can I Challenge a Bad Leaver Clause After I Have Left?

Yes. You can challenge a bad leaver clause after leaving through an unfair prejudice claim, an unconscionable bargain argument, or procedural and drafting failures that make the clause unenforceable. The sooner you take legal advice, the better.

Do I Need a Shareholders’ Agreement If I Already Have Articles of Association?

A shareholder’s agreement offers enhanced rights and protections as a private contract, and can set out what happens if you want to leave. A well-drafted agreement complements the articles, adding clarity on rights and obligations.

Understanding Your Rights Can Protect the Value of Your Shares on Exit 

Disputes over bad leaver clauses are increasingly commonplace. A shareholder’s departure on bad terms where conduct or performance are involved is often unpredictable and contentious.

Companies are increasingly amending their Articles of Association to include punitive bad leaver provisions. Early specialist legal advice will protect your position and share value, particularly if there’s no shareholder agreement.

Unlike generalist firms that handle disputes alongside conveyancing and family law, we only act in disputes — every day, not occasionally. We provide clear advice on your options and when you can challenge bad leaver provisions in your company.

If you’re a director or minority shareholder concerned about amendments to the company articles or already in dispute over share values on your exit, contact Helix Law today for a no-cost, no-obligation initial conversation. Our team act nationally and we would love to help you.