Good And Bad Leaver Provisions Explained For NZ Businesses

If you’ve got co-founders, key employees, or early investors holding equity in your business, you’ve probably had that nagging “what if” question: what happens to their shares if they leave?

This is exactly what good and bad leaver provisions are designed for. They’re a practical set of rules (usually in a shareholders agreement or equity plan) that decide whether someone gets to keep their shares, has to sell them back, and at what price.

Done well, good and bad leaver provisions protect your cap table, reduce disputes, and help you keep control of the business you’re building. Done poorly (or not at all), they can create expensive standoffs right when you need stability.

Below, we’ll break down how good and bad leaver provisions typically work in New Zealand, why they matter, what to include, and common traps to avoid.

What Are Good And Bad Leaver Provisions (And Why Do They Matter)?

Good and bad leaver provisions are clauses that set out what happens to a person’s equity (shares or options) when they stop being involved in the business.

They usually cover:

• Who counts as a “leaver” (for example, a shareholder who is also a director/employee/contractor and stops providing services)
• Whether they are a “good leaver” or “bad leaver” (based on the reason they’re leaving)
• What happens to their equity (keep it, lose it, transfer it, or sell it back)
• What price applies (fair value, market value, cost, or a discounted value)
• Timing and process (notice requirements, valuation method, funding the buyback, and settlement mechanics)

From a small business perspective, these provisions are mainly about protecting the business and the remaining owners.

For example, imagine you and a co-founder each hold 50% of the shares. They leave after a breakdown in the relationship, but they keep their 50%. You now have a shareholder with huge voting power who is no longer aligned with the business, may not want to fund growth, and could block key decisions. That’s not just stressful - it’s a genuine operational risk.

Good and bad leaver provisions help prevent these situations by setting clear “exit rules” from day one.

Where Do Good And Bad Leaver Provisions Usually Sit In NZ?

In New Zealand, good and bad leaver provisions can appear in a few different documents, depending on how you’ve structured ownership and incentives.

Shareholders Agreement

The most common place is a Shareholders Agreement, especially where the shareholders are also working in the business (founders, key staff, working investors).

This is where you typically see:

• leaver definitions
• transfer obligations
• valuation mechanics
• drag/tag rights and share transfer restrictions

Share Vesting Or Equity Incentive Documents

If you’re issuing shares that vest over time (or using an option-style arrangement), leaver rules often tie closely to vesting. This might be in a Share Vesting Agreement and/or an Option Deed.

In practice, many businesses use both:

• Vesting rules to determine what the person has “earned”
• Good/bad leaver rules to determine what happens when they depart (including the price and process)

Company Constitution

Some businesses also include key transfer restrictions in a Company Constitution. This can be useful because a constitution binds shareholders under the Companies Act framework.

That said, you’ll usually want the detailed commercial deal (like valuation and leaver categories) set out in your shareholders agreement and equity documents, not just the constitution.

Employment Documents (Where Equity Is Part Of The Package)

If equity is granted to an employee, the leaver concept should align with the employment relationship and exit process set out in the Employment Contract.

This helps avoid messy overlaps like:

• an employee disputes the reason for termination, which then affects whether they’re a good or bad leaver
• unclear “cause” definitions between employment documents and shareholder documents

How Do You Define A “Good Leaver” Vs A “Bad Leaver”?

There’s no single legal definition in NZ for “good leaver” and “bad leaver”. The categories are commercial definitions you agree on upfront, and they should reflect what your business is trying to protect.

To keep things workable, it’s common to define the categories clearly and tie them to objective events wherever possible.

Common Good Leaver Scenarios

A “good leaver” is usually someone who leaves for reasons that aren’t blameworthy (or are outside their control). Common examples include:

• Illness or incapacity (including long-term inability to perform their role)
• Death
• Redundancy (where a genuine restructure means the role is no longer required)
• Retirement (sometimes with an age threshold or agreed retirement date)
• Mutual agreement (the parties agree it’s best to part ways, often documented carefully)
• Termination without serious fault (depending on how you define this and how it lines up with employment law)

Good leaver treatment is generally more generous because the person isn’t being “penalised” for wrongdoing.

Common Bad Leaver Scenarios

A “bad leaver” is usually someone who leaves in a way that harms the business or breaches trust. Examples often include:

• Serious misconduct (or termination for cause, if defined appropriately)
• Material breach of the shareholders agreement or constitution
• Breach of confidentiality or misuse of IP
• Competing with the business (especially if there are restraint obligations)
• Fraud or dishonesty
• Resignation in bad faith (for example, walking out during a critical period without proper handover - but be careful with how this is drafted)

Bad leaver treatment is typically stricter because the aim is to protect the company and the remaining shareholders from being stuck with an unaligned (or harmful) shareholder.

Be Careful With “Grey Area” Categories

One of the biggest drafting challenges is handling the middle ground - situations like poor performance, relationship breakdowns, or disputes about whether a termination was justified.

If your definitions are too broad or too subjective, you can accidentally build a dispute into your documents. A better approach is to:

• define categories using clear triggers
• include a decision-making process (for example, board determination with conflict rules)
• ensure the wording fits your governance structure and doesn’t contradict employment obligations

What Happens To Shares Under Good And Bad Leaver Provisions?

The “so what?” of good and bad leaver provisions is usually about two things:

• Do they have to transfer their shares (or do unvested rights fall away)?
• If they transfer, what price is paid?

1) Transfer Or Buyback Mechanics

Common outcomes include:

• Compulsory transfer to existing shareholders
• Company buyback (if the company is permitted to do so under its constitution and can comply with the relevant solvency and shareholder approval requirements under the Companies Act 1993)
• Transfer of only certain shares (for example, unvested shares must be transferred, vested shares can be retained or offered)
• Options lapse (unexercised options may automatically lapse on leaving)

In many small businesses, a compulsory transfer to the remaining shareholders (or a nominee) is simpler than a company buyback, but the right approach depends on your cashflow, tax and accounting position, and governance preferences.

2) Pricing: Fair Value, Market Value, Or Cost?

The pricing outcome is often the heart of the negotiation.

Typical approaches include:

• Good leaver: fair value / market value (sometimes with an independent valuation process)
• Bad leaver: lower value (often cost, nominal value, or a discounted fair value)
• Mixed models (for example, vested shares at fair value, unvested at cost)

From a business owner perspective, the key is balancing:

• fairness (so your equity arrangements attract and retain the right people)
• risk protection (so someone can’t damage the business and still walk away with a windfall)
• practicality (so the business can actually fund the outcome without crippling cashflow)

3) How Do You Handle Valuations In Real Life?

Valuations can become expensive and contentious, especially early on when there’s no clear market price for the shares.

To reduce friction, agreements often include:

• a set valuation formula (EBITDA multiple, revenue multiple, net assets, etc.)
• a process for appointing an independent valuer (and whether the valuation is final and binding)
• rules about who pays valuation costs
• timeframes so the exit doesn’t drag on indefinitely

It’s also worth thinking about what happens if the process stalls - your documents should include a circuit-breaker, not just steps that can be used to delay an outcome.

Key Legal And Commercial Issues NZ Businesses Should Watch For

Good and bad leaver provisions are commercial tools, but they sit inside real legal relationships - company law, employment law, director duties, and contract law. If those don’t line up, things can get messy fast.

Make Sure Your Process Is Actually Enforceable

Leaver provisions typically rely on a shareholder contractually agreeing in advance to transfer shares when a trigger happens (and the agreement then giving the company and/or other shareholders a clear way to implement that transfer).

To improve enforceability and reduce disputes, it’s important your documents clearly cover:

• the trigger event (what exactly counts as “leaving”?)
• the notice process and who gives notice
• signing steps (share transfer forms, board approvals, updates to the share register)
• what happens if the leaver refuses to sign (for example, an attorney/agent mechanism)

Where a transfer is required, you also need a proper mechanism for implementing it, including the practical steps for share transfers.

Align “Bad Leaver” With Employment Law Reality

If an employee is treated as a “bad leaver” because they were dismissed for misconduct, but the dismissal process wasn’t handled correctly, you can end up with two problems at once:

• an employment dispute (including personal grievance risk)
• a shareholder dispute about whether the bad leaver trigger was valid

This is why it’s so important to align definitions and processes across your shareholder documents and your employment arrangements.

Consider Director Duties And Conflicts

If the leaver is a director (or the remaining shareholders are directors), decisions about enforcing leaver provisions can overlap with director duties and conflicts of interest.

For example:

• Who decides if someone is a bad leaver?
• What if the board is made up of the remaining shareholders who benefit financially from a lower price?
• How do you document the decision-making so it’s defensible later?

There are ways to manage this (like decision rules, independent input, and good record-keeping), but it needs to be designed upfront.

Plan For Funding The Exit

Even if the documents say the leaver’s shares must be purchased, your business still needs a realistic way to fund it.

Common approaches include:

• remaining shareholders buy the shares personally
• payments are made over time (instalments)
• external funding (less common for small businesses, but possible)
• insurance in specific situations (for example, death/disablement, depending on your structure)

If you don’t plan for this, you can end up with a technically “clear” agreement that is difficult to implement smoothly in practice.

How To Draft Strong Good And Bad Leaver Provisions (Without Creating Future Disputes)

Good leaver and bad leaver clauses work best when they’re simple enough to operate, but detailed enough to prevent arguments.

Here’s a practical checklist of what we typically recommend you think through as a NZ business owner.

1) Be Clear On Who The Rules Apply To

Ask yourself:

• Do these provisions apply to all shareholders or only “service shareholders” (those who work in the business)?
• Do they apply to contractors and advisors as well?
• What about passive investors?

It’s common to treat passive investors differently, because they’re not “leaving a role” in the same way.

2) Define The Trigger: What Does “Leaving” Mean?

This might include:

• resignation as an employee or contractor
• removal as a director
• ceasing active involvement for a certain period
• material breach events (for bad leaver triggers)

3) Tie Leaver Provisions To Vesting Where Appropriate

If you’re using vesting (common in startups and growth-focused SMEs), you’ll usually want to ensure:

• unvested shares are automatically treated differently (often transferred back at cost)
• vested shares follow good/bad leaver pricing rules

This is where a Share Vesting Agreement can do a lot of the heavy lifting, as long as it’s consistent with your shareholders agreement and company structure.

4) Build In A Practical Dispute Circuit-Breaker

Even with great drafting, disagreements can happen. Consider including:

• clear decision authority (and limits)
• independent valuation provisions
• timeframes and deemed outcomes if deadlines are missed
• a structured settlement pathway if you’re documenting a negotiated exit

In some situations, where there’s a dispute and you’re resolving it commercially, it’s also common to formalise the outcome in a Deed of Settlement so everyone knows the matter is properly wrapped up.

5) Don’t Rely On A Generic Template

Leaver provisions sound straightforward, but the details matter - especially where they intersect with valuation, director powers, funding, and employment processes.

A generic clause can leave gaps like:

• no workable valuation method
• no enforcement mechanism if someone won’t sign
• definitions that accidentally create an argument rather than solve one
• conflicts with your constitution or share class rights

Getting these clauses drafted (or at least reviewed) in line with your business model is one of those steps that can save you a lot of pain later.

Key Takeaways

• Good and bad leaver provisions are clauses that set out what happens to a shareholder’s shares or options when they stop being involved in the business.
• They’re most commonly included in a Shareholders Agreement, often alongside vesting documents like a Share Vesting Agreement or Option Deed, and sometimes supported by a Company Constitution.
• A good leaver usually leaves for reasons outside their control (like illness, redundancy, or mutual agreement) and often receives a more favourable price for their shares.
• A bad leaver usually leaves due to misconduct or serious breach, and their equity may be forfeited, transferred back, or priced at cost/discounted value.
• Strong leaver clauses should include clear definitions, a workable transfer process, sensible valuation mechanics, and alignment with employment arrangements to reduce disputes.
• Because these provisions affect ownership and control, it’s worth getting them drafted or reviewed to suit your business rather than relying on a one-size-fits-all template.

Note: This article is general information only and isn’t legal, tax or accounting advice. Share buybacks, transfer pricing, and valuation outcomes can have tax and financial reporting implications, so it’s worth getting advice tailored to your specific structure and situation.

If you’d like help putting good and bad leaver provisions in place (or reviewing what you already have), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.