A good leaver and bad leaver clause decides what happens to a founder’s or employee-shareholder’s shares when that person stops working for a Singapore company. Usually the clause gives the company or the remaining shareholders a right (sometimes an obligation) to buy the leaver’s shares. A “good leaver” (for example, someone who leaves through death, serious illness or redundancy) is paid fair value. A “bad leaver” (for example, someone dismissed for misconduct or who leaves early to join a competitor) is paid less, often the lower of fair value and what they originally paid. The clause only works if it is properly drafted, sits in the shareholders’ agreement and ideally the constitution, and can be carried out under the Companies Act.
This guide is for founders, investors and companies setting up or reviewing these terms, and for a founder who has just been told they are a “bad leaver”.
Why companies use leaver clauses
In a young company, the founders’ shares are usually issued cheaply on the assumption that each founder will keep working in the business. If a co-founder walks away after six months with 30% of the company, the remaining founders end up building value for someone who no longer contributes, and investors see a cap table problem. A leaver clause solves this in three ways:
- It takes the departing person’s shares back into friendly hands so they can be reissued to a replacement.
- It sets the price in advance, so there is no argument about valuation at the worst possible moment.
- It encourages good behaviour, because a founder who breaches restrictive covenants or is dismissed for cause loses value.
Leaver clauses often work alongside vesting. Vesting decides how many shares the founder has “earned” by time served; the leaver category decides the price for the earned and unearned portions. Our guide to the key shareholders’ agreement clauses the model constitution leaves out explains how these terms fit with drag-along, tag-along and pre-emption rights.
Who is a good leaver and who is a bad leaver?
There is no statutory definition. The parties decide, and the definitions are often the most negotiated part of a funding round. A common pattern is:
| Category | Typical triggers | Typical price |
|---|---|---|
| Good leaver | Death, permanent incapacity, serious ill health, retirement at an agreed age, redundancy, dismissal without cause, or anyone the board decides to treat as a good leaver | Fair market value, or fair value for vested shares and a lower price for unvested shares |
| Bad leaver | Dismissal for cause or gross misconduct, resignation within a minimum period, breach of non-compete, non-solicitation or confidentiality covenants, fraud | Lower of fair value and the original subscription price (sometimes nominal value) |
| Intermediate leaver (optional) | Voluntary resignation after the minimum period, without any breach | Fair value for vested shares; cost for unvested shares |
Two drafting points cause most disputes. First, “cause” must be defined, or linked to the employment contract’s summary dismissal grounds, so that an ordinary performance disagreement is not dressed up as misconduct. Second, a “bad leaver if they resign at any time” definition can be commercially harsh for a founder who has built the business for many years; investors increasingly accept a time-limited bad leaver period.
Is a bad leaver price enforceable in Singapore?
Founders who lose most of their value sometimes argue that the bad leaver price is a penalty. Singapore law still applies the traditional penalty rule, which looks at whether a sum payable on breach of contract is a genuine pre-estimate of loss. In Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2020] SGCA 119, the Court of Appeal kept that traditional test and confirmed that the penalty rule applies only to sums triggered by a breach of contract. That matters for drafting:
- Where the bad leaver price is triggered by events that are not breaches (for example, resigning within two years), the penalty rule is unlikely to apply at all.
- Where the trigger is a breach (for example, breaking a non-compete), the clause is more exposed. Framing the low price as the price for unvested or unearned shares, rather than as a punishment, helps.
- Restrictive covenants tied to the leaver price must themselves be reasonable to be enforceable. A non-compete that is unreasonably wide may fail on its own terms.
None of this is automatic. Whether a particular clause will be upheld depends on its wording and the facts, which is why the clause should be drafted or reviewed by a lawyer.
How the transfer actually happens
A leaver clause is only useful if the company can carry it out quickly. The mechanics usually look like this:
- Leaving date and category. The board records the date employment or the service agreement ended and decides the leaver category, with reasons, in board minutes.
- Transfer notice. The leaver is deemed to have given, or must give, a transfer notice offering the shares for sale.
- Price. For a good leaver, fair value is agreed or fixed by an independent valuer named in the agreement (often an accounting firm acting as an expert, not an arbitrator). For a bad leaver, the price is usually a formula.
- Buyer. The shares are offered to the other shareholders, an employee trust, or a new hire. If the company itself is to buy, it must follow the share buy-back rules in sections 76B to 76G of the Companies Act 1967, including the solvency requirements. If no buyer takes them up, the agreement should say what happens next.
- Completion. A share transfer form is signed (the agreement should appoint a director as the leaver’s attorney to sign if they refuse), stamp duty is paid, the board approves the transfer, and the register of members kept by ACRA is updated. Our step-by-step guide on transferring shares in a Singapore private company and the note on stamp duty and share certificates on a share transfer cover the filing side.
The power-of-attorney and deemed transfer provisions are critical. Without them, a leaver who refuses to sign can hold up the transfer, and the remaining shareholders may need to apply to court. See forced share transfers and court enforcement.
Shareholders’ agreement or constitution?
A shareholders’ agreement binds only the shareholders who sign it. The company’s constitution binds the company and every member, including new ones. Many companies put the leaver mechanics in both: the commercial detail in the shareholders’ agreement and a compulsory transfer power in the constitution, adopted by special resolution. Check that the two documents do not contradict each other on pre-emption, valuation or board approval.
What should a leaver clause contain? A drafting checklist
- Clear definitions of leaver, leaving date, good leaver, bad leaver and cause.
- Whether the board has discretion to treat a bad leaver as a good leaver (useful for fairness, but define who decides when the leaver is also a director).
- Vesting schedule and how vested and unvested shares are priced.
- Valuation method, who appoints the valuer, timing, and who pays the valuer’s fees.
- Who may or must buy, the order of priority, and what happens if nobody buys.
- Payment terms, including whether payment can be by instalments.
- Deemed transfer notice, power of attorney and authority to sign transfer documents.
- Treatment of dividends and voting rights between the leaving date and completion.
- How the clause interacts with ESOP options and any separate option plan. Our ESOP guide for Singapore startups covers option leaver terms.
Example
Example only, not a client case. Three founders each hold 30,000 shares subscribed at S$1 each, vesting over four years. After 18 months, one founder resigns to join a competitor. The agreement says resignation within 24 months is a bad leaver event, and that a bad leaver’s shares are bought at the lower of cost and fair value. The other two founders serve a deemed transfer notice and buy the 30,000 shares at S$30,000, even though an independent valuation would have put fair value at S$90,000. Had the founder left because of serious illness, they would have been a good leaver and received fair value for the vested portion.
If you have been told you are a bad leaver
Do not sign transfer documents immediately. Ask for the board resolution recording the decision and the reasons, read the exact definitions in the agreement and constitution, and check whether the trigger actually happened. Disputes often turn on whether the dismissal really was “for cause”, whether the board followed its own procedure, and whether the price formula has been applied correctly. If the treatment is unfair in a wider sense, a shareholder may also consider remedies discussed in shareholder remedies when directors mishandle a company, and how courts approach share valuation disputes.
Frequently asked questions
Does Singapore law require a leaver clause?
No. Without one, a departing shareholder keeps their shares unless they agree to sell. That is why investors usually insist on leaver terms before investing.
Can the company buy back the leaver’s shares itself?
Yes, if the constitution permits it and the buy-back follows sections 76B to 76G of the Companies Act, including the solvency test and the required approvals and ACRA notices. Otherwise the other shareholders or a nominee buys them.
Can leaver terms be added after the company is set up?
Yes, by agreement of the shareholders who will be bound and, for constitution changes, by special resolution. Adding them retrospectively to an existing founder needs that founder’s consent in practice.
Does a leaver clause apply to shares bought from another shareholder?
Only if the clause says so. Many clauses cover all shares held by the leaver and their related persons, however acquired.
Need help with leaver clauses or a departing founder?
If your company, or you as a director or shareholder, is drafting leaver terms or dealing with a founder who is leaving, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will help you understand the documents and deadlines and handle the share transfer, register updates and ACRA filings. Where your matter needs a lawyer, we will refer you to a firm on our panel of Singapore law firms that regularly handles shareholders’ agreements and shareholder disputes. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not legal advice.
Willie Tan, Raffles Corporate Services