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Case law: Bad leaver clauses allowed recovery of money from ex-shareholder who secretly planned to compete

Companies should consider including bad leaver provisions in their articles and/or a shareholders’ agreement, so they can recover sums already paid to a bad leaver for their shares if they are later found to have acted in breach of the agreement and/or their director’s duties, following a recent ruling.

November 2018

This update was published in Legal Alert - November 2018

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Three shareholders entered into a shareholders’ agreement containing ‘bad leaver’ provisions. These, as well as the articles of association, said that if any of them committed a ‘material breach’ of the agreement, the others could acquire their shares at a 50% discount. Among other things, the provisions also required the parties to promote the company’s success, keep accurate accounting records, and to act in good faith towards the company and the other shareholders.

Following declining sales and a failed sale of the company, relations between the shareholders soured. One of them had secretly been preparing to leave in order to set up a rival business. Without knowing about this, the other two formed a company to buy his shares from him for £1.2m.

Days after the sale of their shares, the leaver set up a new company which started competing with the old company. It wrongly used confidential information, diverted sales away from the old company, and diverted funds into the new company’s bank account.

The remaining shareholders claimed that the secret plans the leaver had made while at the old company were in breach of his three obligations (referred to above); were in breach of his duties as a director; and would, had they known about it, have justified summarily dismissing him. Therefore, the bad leaver provisions in the shareholders’ agreement were triggered, with the power to acquire his shares at a 50% discount. The leaver should therefore pay back part of the money they had paid for his shares through the company set up for the purpose.

The High Court agreed. It ruled that had the shares been acquired under the bad leaver provisions, the other shareholders would have paid £650k for them. It therefore ordered the leaver to pay back the excess from what he had been paid.

Operative date

  • Now

Recommendation

  • Companies should consider including bad leaver provisions in their articles and/or a shareholders’ agreement, so that they can recover sums already paid to a bad leaver for their shares if the leaver is later found to have acted in breach of the agreement and/or their director’s duties.

Case ref: Keystone Healthcare Ltd & Anor v Parr & Ors [2018] EWHC 1509

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