48 law
Good leaver and bad leaver provisions in articles
In a typical private equity transaction, management will be granted shares, writes Oliver Kelly, solicitor at Lamport Bassitt
It is a key principle for an investor that management should, generally, benefit from the proceeds of an eventual sale only if they are working in the business at that time. Therefore, the articles often compel a manager to transfer his shares if he leaves the business prior to the sale.
From management’s perspective, this principle is open to abuse. A manager could work for years driving value in the business, but if his employment is terminated shortly before a sale he may lose all the value he has helped to create.
Thus, balancing these competing perspectives is key and the ’good leaver’ and ’bad leaver’ provisions will determine the value of the manager’s shares.
The definitions will be carefully negotiated by the parties.
The investor will want to prescribe narrowly the circumstances in which a leaver will be a ’good leaver’. They want the definition of ’good leaver’ to be limited to certain circumstances such as death or permanent disability and ’bad leaver’ to be defined as a departure in any other circumstance. Conversely, the managers want to limit the definition of ’bad leaver’ to certain serious circumstances where they are at fault (eg termination of employment for cause) and for ’good leaver’ to cover a departure in any other circumstances.
The definitions directly impact on the value of the leaver’s shares. If he is a ’good leaver’, the manager
will most often receive market value for his shares. If he is a ’bad leaver’, he will often receive the lower of cost and market value for his shares.
In some cases, the articles may provide that: • the leaver is entitled to retain a specific percentage of his shares (typically determined by reference to his period of ownership). This is known as ’ownership vesting’ and is uncommon; or
• he may receive market value for a certain percentage of his shares and cost for the remainder. This is known as ’value vesting’ and is more common. It is often expressed as an
Should your business be a Limited
The LLP has become the vehicle of choice for conducting a much wider range of business. For many owner managers, an LLP has a number of key financial and commercial advantages and few disadvantages over both general partnerships and limited liability companies. Some of these advantages include:
For traditional partnerships:
• Limited liability status so that LLP members are, as a general rule, liable only to the extent of their capital contribution to the LLP
• A separate legal entity so that LLPs can enter into contracts, buy, sell and lease property in their own name, so there is no need for partners to hold assets, such as shares or leases on trust for the partnership
• A more up-to-date regulatory framework governing the role and responsibilities of members and partners of LLPs.
www.businessmag.co.uk For limited liability companies:
• A potential saving in employers’ national insurance contributions currently at a rate of 13.8%
• Other possible tax planning opportunities including minimising the tax payable on retained earnings within the business of the LLP
• Removing many customary burdens on the business, such as buying back the shares of departing owners
• Greater flexibility of LLPs in aligning performance and remuneration
• Enabling any distribution to owners of the LLP on the ultimate sale of the business to reflect performance over the long term
• Removing the need for the appointment of directors and substituting the more flexible role of partners or members
’intermediate leaver’ - a middle ground to resolve differences between management and the investor on leaver provisions.
It is important that the leaver provisions in the articles do not conflict with and are aligned with terms and definitions in the proposed service agreements.
Details: Oliver Kelly 023-8083-1902
oliver.kelly@
lamportbassitt.co.uk www.lamportbassitt.co.uk
Liability Partnership? Manches' Thames Valley corporate lawyer, James Went, describes the benefits of LLP status
• Whilst at the same time retaining the chief advantage of limited liability status for all members.
Not only can an LLP reduce liability for partners and streamline many of internal management processes if you are converting from a company, but many corporate clients find that savings in employer’s National Insurance Contributions cover the legal costs of conversion in the first year of operation.
Manches has designed LLP Plus, an integrated, full service LLP formation and conversion service, which provides a step-by-step process to convert a business into a limited liability partnership and where we offer a free initial discussion on the benefits for your business.
Contact us and we will send you further information, including a free guide to LLP conversion and a simple healthcheck questionnaire - all on
THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER 12/JANUARY 13
a no-obligation basis. Our standard formation and conversion package has a fixed price, determined on the size and nature of your business. On completion of the questionnaire, we will discuss your individual requirements, provide a fixed price quote and quote for any optional add-ons.
Details: James Went
james.went@manches.com 01865-813675
www.manches.com
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