Harper James advises UK businesses on structuring employee share schemes and the associated shareholder, employment and corporate documents under the laws of England and Wales. Leaver provisions determine what happens to an employee’s shares or options when their employment ends, so they should be agreed when the scheme is created rather than added during a dispute.
A scheme normally distinguishes between a good leaver, a bad leaver and, in some cases, an intermediate leaver. A good leaver usually leaves because of circumstances such as death, ill health, retirement or redundancy. A bad leaver usually leaves following serious misconduct, breach of restrictive covenants or resignation in breach of agreed conditions. An intermediate category can deal with ordinary resignation, dismissal without gross misconduct or other circumstances that do not fit either main definition.
The documents should state how each category affects vested and unvested interests. Under an EMI option scheme, for example, unvested options may lapse when employment ends, while vested options may remain exercisable for a defined period. For actual shares, the provisions usually create a transfer obligation and specify the price. A good leaver may receive market value, while a bad leaver may be required to transfer shares at the lower of market value and the original subscription price. The wording must match the commercial purpose of the scheme and the tax treatment intended.
The company should define leaver events precisely, including notice periods, garden leave, dismissal for misconduct, redundancy, death and disability. It should also identify who decides the leaver classification, the valuation method, the date used for valuation and the process for resolving disagreements. Directors should check that the articles of association, shareholder agreement, option agreements and employment contracts operate consistently. A transfer restriction in one document is ineffective if another document gives the employee an inconsistent right.
When an employee leaves, the company should record the reason and effective leaving date, calculate vested interests, obtain any required valuation and issue the relevant notices within the contractual time limits. The board should also review confidentiality, intellectual property and restrictive covenant obligations. Clear drafting reduces uncertainty, but it does not remove the need for a fair and properly documented decision, particularly where the classification affects the value of an employee’s shares.