Paying the Penalty? Could leaver provisions be unenforceable penalties?

The ability to require a shareholder who ceases to be a director or employee to transfer his or her shares is an important right for investors, allowing them to ensure shares are only held by those individuals who are responsible for delivering the growth of the business. But previous cases have seen arguments that the ability to force a compulsory transfer of shares at less than market value where the individual is a "bad leaver" amounts to a penalty, which is unenforceable under English law.

In Signia Wealth Limited v Vector Trustees Limited the court held that leaver provisions are not unenforceable penalties, providing welcome comfort for investors who regularly rely on these provisions. The judgment also highlights some other key aspects relating to the operation of leaver provisions, including the importance of carefully following the compulsory transfer provisions and how to determine the fair or market value of shares that are being transferred.

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Mike Hinchliffe

Mike Hinchliffe

Partner, Head of Private Equity
London, UK

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