Don’t wait for a crisis — ensure clarity now

Many SME owners only start considering how the transfer of their company’s shares is arranged when faced with a crisis situation.

Can I sell my shares myself? Can I force a minority shareholder to sell their shares? Should everyone remain a shareholder, or do we want only active shareholders?

Illness, retirement, or a partnership that no longer works as it should — these are often the moments when you realise your shareholding is far less liquid than you thought. Know that agreements can be made in advance to address this.

This is done, among other things, by drafting good leaver and bad leaver clauses.

1/ A “good leaver” is a shareholder who leaves for legitimate, foreseeable reasons — not due to breach of duty or misconduct. Typical good leaver triggers include: retirement, illness or disability, death, and termination of the partnership by mutual agreement. A good leaver clause grants this shareholder fair conditions: the good leaver can sell their shares at a market-based price and within a reasonable exit period. This gives the remaining shareholders time to arrange financing or find a buyer.

2/ A “bad leaver” is someone who leaves due to violation of their obligations (e.g., engaging in competing activities) or misconduct — in short, actions that harm the company or other shareholders. A bad leaver clause therefore protects the company and the active shareholders. The consequences are clear: the bad leaver is obliged to sell their shares at a (significantly) reduced price.

When drafting such protective clauses, the aim is to strike a balance between active and passive shareholders.

• An active shareholder is directly involved in the management of the company. They sit on the board, work full-time in the business, determine strategy, and bear risk and responsibility.
• A passive shareholder is a financial investor. They have no board role, no operational function, and receive dividends only. These can be heirs, external investors, or partners who have withdrawn from active involvement.

The key is to structure agreements that protect both active and passive shareholders:

• Drag-along rights: Active shareholders can force a sale if passive partners block it.
• Tag-along rights: Passive shareholders can join in the sale when active shareholders sell.
• Put/Call options: Passive shareholders can force a buyout at a fair price, or active shareholders can oblige passive shareholders to sell their shares.
• Dividend protection: Passive shareholders are guaranteed minimum distributions.
• Non-compete clauses: Active shareholders are bound; passive shareholders are not.

By discussing each shareholder’s expectations in advance and recording clear, written agreements accordingly, many conflicts can be avoided.

Our advice is therefore: do not wait until a crisis forces you to act. Ensure clarity now. Whether you are an active founder protecting your business or a passive investor seeking certainty, you deserve agreements that are fair and transparent.