“Bad leaver” provisions triggered by resignation held not to be unconscionable or a penalty

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What happened?

Ms Nosworthy (an employee shareholder) entered into a share sale agreement with her employer, which provided that, should she voluntarily resign, she’d be required to forfeit her shares and loan notes. She also entered into a Deed of Adherence, in which she agreed not to become a bad leaver –and that if she did, the employer would acquire her shares at the lower of acquisition cost and fair value.

Following her resignation, the employee was treated as a bad leaver, and she subsequently issued a claim for breach of contract and for unauthorised deductions from wages, challenging the legality of the bad leaver provision.

What was decided?

The EAT ruled that the bad leaver provisions neither amounted to an unconscionable bargain, nor were they void as penalty clauses.

For a bargain to be “unconscionable”:

  1. the claimant must have been at a serious disadvantage (e.g. through poverty, ignorance, or lack of advice)
  2. the defendant must have exploited that disadvantage in some morally culpable matter, and
  3. the resulting transaction must be overreaching and oppressive.

The employee had taken legal advice before entering into the share agreement – as such, she failed to satisfy the first requirement of suffering a disadvantage. The employer was therefore entitled to rely on the bad leaver provisions following her resignation.

For a penalty clause to be found, it must take effect following a breach of contract. Here, the employee didn’t breach her contract – she merely satisfied the criteria of being a bad leaver.

Equally, the remuneration committee (who were responsible for the bad leaver determination) was found not to have acted unfairly or in bad faith in making its decision – the bad leaver provisions and the committee’s surrounding discretion were clear enough.

Finally, the provisions didn’t amount to an unlawful deduction of wages given that, although connected to her employment, the shares were given to the employee in her capacity as a shareholder, and not as a worker.

What’s the impact?

The case doesn’t change the law, it simply reinforces the fact that bad leaver provisions still can and will be upheld by the tribunals, so it’s good news for investors and companies looking to protect their businesses.
Prospective employee shareholders should, therefore, seek legal advice in negotiating leaver provisions, ensuring that any bad leaver provision is limited as far as is reasonably possible.

For more information, please get in touch.

Nosworthy v Instinctif Partners Ltd