36 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


Protecting the bank of mum and dad when lending to loved ones


Withdrawals from the bank of mum and dad are at a record high. It is becoming an increasing reality in this economic climate for young people to look to their parents for a helping hand onto the property ladder


Research by the Centre for Economics and Business Research (Cebr) shows that between 2008 and 2011 parents helped to finance 100,000 first- time purchases, which is almost one in five of all first-time buyer sales.


“First-buyers are facing a tough time, as mortgage lending has become more difficult to obtain,“ explains Katy Barber, a legal specialist in this area with leading regional law firm Moore Blatch.


“Because banks now require a substantial deposit many families may be considering helping their children financially. The research backs this up, with lending by families up by a third.“


www.businessmag.co.uk


According to Barber: “While it is never nice to think about things going wrong, if you are lending money to a loved one you need to make sure that you take the right measures to ensure your investment is protected, particularly if your child intends to cohabit or marry in the future.“


Barber says that if you are considering lending money to help buy property there are five simple steps to protect your money.


Five simple steps


1. Have a written loan agreement in place to record any money you give to your children and their partners or spouses.


’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


your child intends to live with a partner in the property that you have part-funded. This will outline the terms of their relationship and protect your financial interest if their relationship breaks down.


5. Consider putting a prenuptial agreement in place if your child decides to marry after purchasing a property with your help. This will ring-fence any assets bought with your money before the marriage.


2. Consider registering a legal charge over the property in your favour.


3. Consider purchasing the property with your child as ’tenants in common’ and confirm who owns what share of the property in a declaration of trust.


4. Draw up a cohabitation agreement if


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – DECEMBER 12/JANUARY 13


Often people seek advice after the event which can prove to be a costly mistake. Barber explains: “It is really important that you seek proper expert legal advice early on, at the time when money is being loaned, to ensure that the correct legal safeguards are all in place, and the risk of losing your money is avoided.“


Details: Katy Barber 023-8071-8000 www.mooreblatch.com


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