On the departure of a statutory director/shareholder, any participation in the company must also be settled. Then a discussion may arise about the value of this participation, depending on whether the director counts as a good leaver or bad leaver. What should companies and directors pay attention to when interpreting a leaver arrangement?
Disputes regularly arise on the interpretation of the leaver arrangement for the statutory director. Does the director qualify as a good leaver or a bad leaver?
In a recent North Holland District Court case, the new director of a BV had first become a minority shareholder and would eventually take over the entire BV. The shareholders’ agreement contained an early/bad leaver arrangement, which stated that the director had to offer his shares for 50% of the value to the other shareholders if he terminated the employment or management agreement within five years for a reason other than death, disability or long-term illness.
Less than a year and a half later, the director expresses his wish to abandon the full takeover of the company and cease working. The BV claims that the director, as early/bad leaver, offers his shares for 50% of the value. According to the director, the early/bad leaver arrangement cannot be invoked because he has not terminated his management agreement, but has only indicated his wish to stop working due to illness. In the proceedings, however, it is established that the director terminated the management agreement before calling in sick. The court therefore rules that the early/bad leaver rule applies. The director must transfer his shares to the BV for 50% of their market value.
A BV or NV has articles of association containing the basis of the legal relations between the parties. However, the articles of association do not cover all subjects that may be important within the company. Hence, a shareholders’ agreement is often concluded by the shareholders of a company. This shareholders’ agreement supplements the agreements contained in the articles of association. A common subject in such a shareholders’ agreement is the mandatory offer of shares on the departure of the director/shareholder, the leaver arrangement. This arrangement contains the agreements on what should happen if a shareholder wants to leave the company.
A leaver arrangement stipulates two things:
Usually, the leaver arrangement means that a departing shareholder must offer the shares to the remaining shareholders. To determine the price, a distinction is often made between good leavers and bad leavers, usually depending on the reason for the departure and/or the timing.
Directors/shareholders who leave the company are in principle qualified as good leavers if they do not leave prematurely or there is no culpable reason for the dismissal. This may be the case, for example, if it is agreed that a shareholder can leave the company after three years or if he has to leave earlier due to illness.
If directors/shareholders leave early or if their dismissal is culpable, they may qualify as bad leavers. This will be the case if the shareholder’s employment or management contract is terminated for an urgent reason, such as fraud or theft. If shareholders leave after only a short time, such an arrangement may also apply, as they will be considered early leavers.
The term bad leaver already indicates that a penalty applies upon departure. Whereas good leavers can get the market value for the shares when they leave, bad leavers have to offer their shares at a lower price as a “penalty”. A lower price could include the following options:
The nominal value – the amount for which a share was originally issued – is often well below the current market value. If the company has been running for a few years and the value of the shares has gone up considerably, it is often agreed that the bad leaver should offer the shares at a certain percentage of the market value, e.g. 50%, to keep things somewhat reasonable for the shareholder.
In practice, disputes about the leaver arrangement regularly arise where there is a discussion about whether the departing shareholder qualifies as a bad or good leaver. It is therefore advisable to articulate the difference between the two in the leaver arrangement as clearly and objectively as possible.
Clarity about who qualifies as a bad leaver offers, for instance, linking up with the urgent reason from Sections 7:677 and 7:678 of the Dutch Civil Code. This is a good criterion, because an urgent reason is not easily assumed and must be well substantiated. In addition, it should be clearly defined when there is an early departure and what the consequences are.
If there is no dispute about the qualification of good or bad leaver, a discussion may still arise about what the market value of the shares is. It is therefore advisable to include in the shareholder agreement how the market value will be determined. This may be done by including a clear objective formula or appointing an independent expert who will determine the market value in case of a dispute. The manner in which the reference date for the value of the shares is determined can also be laid down in advance.
A director was dismissed as a statutory director during a general meeting of shareholders, because he continued to dysfunction despite an improvement plan. The company had a Management Participation Programme (MPP) in place, which provided for profit sharing for managers, with a leaver scheme. As part of the negotiations to reach an amicable settlement, the director was first referred to as good leaver. When the parties failed to reach a settlement agreement, this was changed to other leaver, apparently a euphemism for bad leaver. As a result, the director was not paid his profit share. According to the director, the BV had thereby acted seriously culpable and he was therefore entitled to fair compensation.
The BV argued undisputedly that the MPP was not a condition of employment and that the supervisory board of the group determined whether someone was considered a good leaver or an other leaver. The district court therefore ruled that the BV had not settled the employment contract negligently, and therefore there was no serious culpability and no right to fair compensation.
The director appealed. He again claimed fair compensation or else damages, because the BV had prevented him from qualifying as a good leaver. The BV put forward the same defence to this as in the court, adding that it was clear that the director would only qualify as good leaver as part of the settlement agreement. That agreement was not concluded, whereupon the Supervisory Board decided to qualify the director as other leaver because there was a reasonable ground for termination, namely dysfunction.
The court ruled that the MPP was a reward for work performed and therefore did constitute a condition of employment. Because the MPP does not define good leaver and other leaver, this entails the risk of arbitrariness. According to the court, this was the case. After all, the director was first classified as a good leaver in the context of negotiations on a settlement agreement and then as an other leaver after the negotiations broke down. The court found that the BV did not provide sufficient reasons as to why the director was first and then not regarded as a good leaver.
In addition, the BV did not behave as a good employer. The director had always worked for the company to the best of his ability. Therefore, the director was entitled to expect that the BV would plead before the Supervisory Board to qualify the director as a good leaver. It has not been stated or shown that the BV did so. The court therefore ruled that the BV must compensate the director for the loss resulting from the failure to qualify as a good leaver, some €16,000. However, the director is not entitled to fair compensation as he was given sufficient opportunity to improve his performance.
As the above practical examples show, if no clear objective definitions of good leaver or bad leaver are included in the shareholders’ agreement or a Management Participation Programme, discussions on the leaver arrangement can quickly arise. It is therefore very important to define these terms as clearly and objectively as possible. Even if a body is designated with the discretionary power to answer the qualification question, this must be done on good grounds and be justifiable.
Want to know more about director and shareholder departure arrangements? Do you have a dispute with a statutory director or shareholder and are looking for legal advice on this? Our specialists will be happy to assist you. Please contact us:
On Monday 4 November 2024, Russell Advocaten Russell Advocaten will host a seminar on Dutch labour law for diplomats, consular agents, and administrative staff from Embassies and Consulates in collaboration with Diplomat Magazine.
On Wednesday 2 October 2024, Jan Dop will be one of the members of the panel that will present timely labor and employment law issues to Primerus clients.
On Tuesday 24 September 2024, Reinier Russell and Jan Dop will speak at the Technical Meeting of PAiE, the organisation of professional accountants in Europe.
Before the Enterprise Chamber can grant a request for an inquiry, there must be well-founded reasons to doubt the correct policy or course of events within a company. When is this the case?
In an article in the April 2024 issue of Lady Justice, the magazine of the Women Lawyers Section of Primerus, Lisanne Meijerhof shares her passion and expertise in charity law. Why has she chosen to focus on the law of foundations and other philanthropic organizations? What legal issues should charities be aware of?
From 1 January 2025, the Dutch Tax and Customs Administration is going to enforce the Deregulation of Assessment of Employment Relationships Act (DBA). How will this affect principals and self-employed workers?
