It is not uncommon in Articles of Association and Shareholder Agreements to include provisions that enable shares to be transferred for different values depending on when a employee shareholder leaves the employment of the company and has to transfer his or her shares.

Recent case law has resulted in it being necessary to consider whether or not requiring a shareholder to compulsorily transfer shares at par or a lower value than an open market value could be a penalty rather than a genuine pre-estimate of loss.

Under English Law, if a contractual provision is judged to be extravagant and unconscionable and therefore a penalty is likely to be unenforceable or void.

Recent case law has made it clear that it is not sufficient simply to rely on ‘commercial justification’ grounds to determine whether or not a ‘bad leaver provision’ is enforceable.

Those with such provisions of Articles of Association and Shareholders Agreements should look to review their provisions as a matter of urgency.

Should you have any questions or queries please do not hesitate to contact Stuart Mullins.

Tel: 01491 570900

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