The ‘Dead Leaver’ – Personal Matters in Business

Good/bad leaver provisions are commonplace in shareholders’ agreements. They are often the topic of much discussion between the parties. The part on execution and performance of the provision is sometimes somewhat overlooked. In this blogpost I will focus on the leaver in case of death.

I will start off by giving a short overview of standard good/bad leaver provisions in shareholders’ agreements with a third party (venture capital) investor for startups and emerging companies in the Netherlands, and follow up with the execution part of these provisions including in relation to succession law, before I come to a conclusion at the end of this blogpost.

Standard good/bad leaver provisions in shareholders’ agreements

The list of leaver provisions can range from concise to extremely extensive, but the following provisions are usually included. A manager/shareholder is deemed to be a bad leaver if: i) he competes with the company, ii) he leaves the company of his own accord before an agreed upon date, iii) he is laid off as manager due to a material breach of the shareholders’ or his management agreement with the company, iv) he commits a breach of his management agreement which would be considered an urgent cause if the manager had had an employment agreement with the company, or v) if a change of control occurs in its own capital in case the shareholder is a legal person.

Sometimes the good leaver situations are formulated to include every situation, in which a manager loses his position with the company, that does not qualify as a bad leaver situation. When specified, good leaver provisions usually include: i) (long-term) illness, ii) death, iii) the manager leaving the company upon request of the third party investor or the company, or iv) an agreement between the parties.

Execution of the good/bad leaver provision

What happens if a good or bad leaver situation occurs? The most commons options are that the leaver has the obligation to offer or transfer all his shares in the company to i) the other shareholders, ii) the company (with observance of the rules of Section 2:207 of the Dutch Civil Code/DCC), or iii) a trust office (in Dutch: stichting administratiekantoor) against the issuance of depositary receipts for shares. Sometimes the percentage of shares, to be offered by the leaver, decreases by the lapse of time (reverse vesting mechanism) or the achievement of certain milestones.

In good leaver situations the price of the shares is equal to the fair market value of the shares. For bad leavers the price of the shares is usually much lower, for instance, the nominal value of the shares.

In most cases, the period of time in which the bad leaver has to offer and transfer his shares is very limited and for the good leaver that same (short) timeframe often applies.

In a bad leaver situation there are no objections to a short period of time for offering or transferring shares. The offering or transferring manager or shareholder is a contracting party and the reason for the transfer is that that manager or shareholder is in breach of his agreement with the other shareholders or the company. In a bad leaver situation it cannot be reasonably required from the company to have that manager or shareholder be shareholder for too long. Any interest the bad leaver has by keeping his shares in the company must yield to the best interest of the company.

In a good leaver situation however, the same arrangements can lead to a conflict of interests between the leaver and the company. For instance, in case of the death of a shareholder, his relatives can be obliged to offer the shares to the other shareholders within a short period of time if no exception has been made for this situation. Offering shares in a company within the first two weeks after the death of a loved one is not high on most people’s priority list. On the other hand, the company has lost an important officer and wants to move forward as quickly as possible. The remaining shareholders will usually have the common sense (and decency) to wait for the dust to settle before asking the relatives to transfer the shares.

Succession law perspective

Of course, succession law plays a part in a leaver situation following the death of a manager/shareholder. The other shareholders will have to deal with the heirs or the executor of the estate (in Dutch: executeur van de nalatenschap). First of all, this takes time. The agreed upon term for transfer will not likely be met. It will take the executor some time to identify and list all assets of the deceased, the heirs and other recipients of bequests (in Dutch: legaten). In the Netherlands, shares in a company are very often bequeathed (in Dutch: gelegateerd). The manager/shareholder will usually have considered to whom he or she wants to leave their shares in the company.

Bequests lead to transfers under particular title – as opposed to inheriting the shares, in which case the shares are transferred under universal title. With a transfer under particular title, obligations laid down in agreements do not transfer to the beneficiary of the bequest. In other words, the shareholders’ agreement may not influence a transfer of shares by way of a bequest. The joint heirs, however, do inherit the obligation to offer the shares under the shareholders agreement. In addition, the articles of association of a Dutch private limited company often include a provision that the shares have to be offered to the other shareholders following the death of a shareholder (or, as the case may be, their permission needs to be obtained). How do these obligations relate to a bequest by the shareholder: which obligation of the joint heirs prevails?

To be clear: this question is moot if the manager/shareholder does not hold his shares in the company in person, but through a personal holding company. In that case, the shareholder is a limited liability company, which remains bound by the shareholders’ agreement even if the shares in that holding company are transferred to a beneficiary by way of a bequest.

The beneficiary may request the court to exempt the transfer restrictions contained in the company’s articles of association, so that the legacy (i.e. the shares) can be received (in accordance with Section 2:195 Sub­section DCC). The court will only honor this request if the beneficiary’s interests sufficiently outweigh those of the other parties concerned. Nevertheless, this possibility forms a noteworthy exception to the closed nature of the private company with limited liability.

Now, although the joint heirs will in principle still be bound by the leaver provision in the shareholders’ agreement (and will thus be obliged to offer the shares to the existing shareholders anyway), it is conceivable that this provision, too, could be exempted by a court for reasons of reasonableness and fairness – especially if the court has already decided to exempt the transfer restrictions contained in the company’s articles of association. Another possibility is that the leaver provision could simply be breached. In both cases the beneficiary would acquire the shares, in spite of the obligation to offer contained in the articles of association and the shareholders’ agreement.

Succession law gives rise to other questions and possibilities. For instance, a child of the deceased shareholder is entitled to request the courts to transfer the shares to himself (or their spouse) against a reasonable price (in accordance with Section 4:38 DCC). The court may honor this request if the child’s interests sufficiently outweigh those of the other heirs. Because this is an exceptional situation, I will not elaborate on this.

It is not possible to eliminate the possibility to bequest one’s shares by agreement. Section 4 of Book 4 of the Dutch Civil Code renders null and void any (provision in an) agreement which would prevent a person to freely exercise any power relating to his estate. This includes provisions to, for instance, prohibit the bequeathing of shares in the company or the obligation to bequeath the shares to the company itself or to the other shareholders.


In this day and age, family matters. Most entrepreneurs don’t think about the consequences for their loved ones of the provisions in shareholders’ agreements and other business contracts. As with all documents we draft and sign, it can be very instructive to work through the possible good and bad leaver situations as if they had actually materialized.

It is also good to note that the rules based on Dutch succession law cannot be set aside very easily. Succession law may lead to surprising twists and turns when it comes to the supposedly closed circle of shareholders of the Dutch limited liability company.

This guest blog by Benvalor senior associate Marije vd Bergh initially appeared on Benvalor’s Venture Capital blog

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