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Employee ownership can be very powerful. It can align incentives, reward contribution and help key people think like owners. But it also needs a clear answer to a difficult question: what happens to the shares if that person leaves?
Employees and share owners wear separate hats. An employee can resign or be dismissed, but that does not automatically mean they stop being a shareholder. Without a compulsory transfer mechanism in the articles or shareholders’ agreement, a departing employee-shareholder may continue to hold shares, retain voting rights and receive dividends.
That may be perfectly acceptable in some businesses. In others, it can create real leverage for a disgruntled or departing individual, particularly where decisions require shareholder consent or where the ongoing owners are trying to attract investment, restructure or sell.
A leaver provision can connect the two positions. It can require shares to be offered for sale when employment ends, and it can set out how the price is calculated. Some agreements distinguish between “good leavers” and “bad leavers” (and other degrees in between); others simply require a transfer at market value, nominal value or a formula price depending on the circumstances.
This isn’t about punishing people for leaving, rather it is to protect the business itself. If shares were issued because someone was expected to contribute to the business, the documents should explain what happens when that contribution ends.
These provisions are much easier to agree at the start, when everyone is aligned, than at the end, when the relationship may already be strained.
