23 April 2024

Bad leaver provision too bad?

A legal exploration of the scope and permissibility of the ‘bad leaver’ provision in The Netherlands.
In the complex landscape of partnership and shareholder agreements, terms such as ‘good leaver’ and ‘bad leaver’ are crucial in determining the rights and obligations of departing shareholders. Leaver provisions are agreed to ensure that a departing shareholder is not left as a (passive) shareholder when the involvement in the company changes. A “good leaver” generally leaves without any problems, while a “bad leaver” often results from a situation of conflict or unwanted departure.
These distinctive terms have significant implications, especially with regard to share transfers and their financial consequences. Because of the impact of the consequences, it is important to have a clear picture of the legal aspects when entering into such a clause.
In this contribution, we will highlight the role of reasonableness and fairness in the interpretation and application of “bad leaver” clauses in The Netherlands. In doing so, we will also provide recommendations for drafting clear and objective bad leaver clauses, as this will prevent costly and complicated litigation later on.

Good leaver vs. bad leaver

A leaver provision regulates the obligation of a shareholder to offer the shares he holds in the company under certain circumstances.

A ‘good leaver’ is generally a shareholder who leaves the company without pre-qualified reasons of ‘bad’ or ‘early’ leaver. For example, after expiry of a certain term, by mutual consent, or after retirement or death or long-term illness.

In such cases, depending on the terms of the agreement, the leaver may be obliged to offer the shares at “fair market value” or a predetermined approximation of the fair price.

However, things get more complicated when the shareholder is classified as a “bad leaver”.

Depending on the agreement, the shareholder may in that case be obligated to transfer the shares at a contractually determined purchase price that will generally be lower than the ‘fair market value’. The agreement may even provide that the departing shareholder will not receive more than the nominal value for its shares.

The financial consequences of qualifying as a bad leaver and the settlement included therein can therefore be significantly detrimental to the departing shareholder. For example, the bad leaver may have to offer its shares of considerable value for as little as one euro or a greatly reduced price.

A ‘bad leaver’ provision is therefore often a point of contention for the parties. In case law, this more than once leads to the question whether this forced transfer and its adverse consequences are in line with the standards of reasonableness and fairness. There is also debate in the literature as to whether the bad leaver provision should be reduced on the basis of Section 6:91 of the Dutch Civil Code (‘DCC’) in conjunction with Section 6:94 DCC because it should be regarded as a disguised penalty clause.

Interpretation of the bad leaver provision

Before being able to test the reasonableness and fairness and the qualification of penalty clause, we must first determine how the ‘bad leaver’ provision should be interpreted. As with any other contractual agreement, freedom of contract applies in principle.

The Court of Appeal of The Hague, in a judgment dated 28 March 2023[1], emphasised that the provision cannot be interpreted (purely) linguistically alone; in this case, the Haviltex standard applies, looking, among other things, at the intention of the parties. However, it becomes difficult to interpret the ‘bad leaver’ provision differently the more objectively it is formulated. This could include a ‘bad leaver’ provision that refers to the urgent reason for dismissal described in Section 7:678 DCC. In this case, when assessing whether there is a ‘bad leaver’, the text and the law will be followed more quickly. 7:678 DCC. In this case, the assessment of whether there is a ‘bad leaver’ will more readily follow the text and the law. Section 7:678 DCC makes the provision more concrete but at the same time creates a high threshold for assuming a ‘bad leaver’ situation.

A clear and objective provision therefore plays an important role in the interpretation of the ‘bad leaver’ clause. However, it will not provide any guarantees because the Haviltex standard will still apply.

Reasonableness and fairness or a penalty after all?

Next, we return to the question of how far one can go with the bad leaver clause in terms of adverse financial consequences for the leaver before it is deemed contrary to reasonableness and fairness. After all, it does not seem reasonable to have to offer shares worth, say, more than €1 million at the nominal value of €1.

In a dispute before the District Court of The Hague on 20 June 2018[2] (which was upheld on appeal), the question was whether the former director of the company was bound by the ‘bad leaver’ provision and therefore had to transfer his shares at their nominal value.

The management agreement had been terminated by the company for urgent reasons and the court considered this a justified dismissal under Section 7:678 DCC. According to the management agreement, the former director had to transfer his shares at nominal value in case of dismissal due to an urgent reason. The (former) director tried in vain to get out of the provision by invoking reasonableness and fairness. However, the court did not go along with his reasoning.

The court considered that this clause had already been agreed upon in the letter of intent. Moreover, the party was assisted in this by specialists, including lawyers and accountants. According to the court, the director therefore had to be aware of the scope and (financial) consequences of the clause. To the extent that this was not the case, this should still be for the director’s account and risk. Finally, the court emphasises that the threshold for assuming urgent reasons is high and can only be accepted in case of seriously culpable behaviour of the director. As a result, the court concludes that the former director is bound by the provision and an appeal to reasonableness and fairness does not succeed. Thus, the mandatory offer of shares at par value does not automatically violate reasonableness and fairness.

Regarding the qualification of the bad leaver provision as a penalty clause as referred to in Section 6:91 DCC, the court in this ruling ruled that the offer obligation in this case could not be qualified as such. After all, the obligation arose from the occurrence of a certain event and not a breach of the obligation, namely the termination of the management agreement. In addition, the court ruled that a penalty clause must focus on compensation for damages or to induce performance. This, as in this dispute, will not easily be the case. Thirdly, here too, the intention of the parties was important and a different penalty provision had been agreed elsewhere in the contract from which the court inferred that the bad leaver provision would then not be intended as a penalty. A mitigation of the bad leaver provision under Section 6:94 DCC was therefore not valid.

According to the court, the former director was therefore justified in offering his shares at nominal value. The ultimate difference between the nominal value and the market value in this case amounted to almost €5,000,000. The importance of a well-formulated bad/good-leaver provision is thus evident.

Conclusion and recommendations

The above shows that the forced transfer of shares at par value as a result of a bad leaver provision is in principle possible and permissible. Under which circumstances this is possible will depend on the specific circumstances of the case.

It is advisable for both the company and the (future) shareholders to draw up a delineated and objective bad leaver provision and to clearly write down its consequences in order to avoid ambiguities in the future. Here, attention should be paid to the definition of ‘bad leaver’ and when it applies.

Consequences such as price, damages or competition provisions should be explicitly specified.

However, the interpretation and application of the provision always remain subject to the Haviltex standard and therefore it is very important to seek timely legal advice.


If you have questions about the good leaver or bad leaver clauses, or if you would like to discuss further, please contact Mathijs Arts, Reinoud van Ginkel, or one of our other Mergers and Acquisitions (M&A) specialists. 

[1] ECLI:NL:GHDHA:2023:961

[2] ECLI:NL:RBDHA:2018:7368

M.A. (Mathijs) Arts

Attorney at Law & Partner

Call: +31 172 530 250