Good and bad leaver provisions: a Russian and English law comparison | Practical Law

Good and bad leaver provisions: a Russian and English law comparison | Practical Law

A table comparing and summarising the Russian and English legal positions on good and bad leaver provisions. This is part of a set of resources comparing the English and Russian law positions on commonly used terms in international agreements.

Good and bad leaver provisions: a Russian and English law comparison

Practical Law UK Practice Note 4-504-3691 (Approx. 5 pages)

Good and bad leaver provisions: a Russian and English law comparison

by Ian Ivory and Anton Rogoza, Goltsblat BLP, Moscow
Law stated as at 19 Jan 2011 • England, Russian Federation, Wales
A table comparing and summarising the Russian and English legal positions on good and bad leaver provisions. This is part of a set of resources comparing the English and Russian law positions on commonly used terms in international agreements.

Good and bad leaver provisions

English law
Russian law
Leaver provisions are a contractual mechanism covering employees who are also shareholders in a company. Under these provisions, when an employee leaves the company they must compulsorily transfer their shares either:
  • Back to the company.
  • As the company directs (for example, to a new incoming employee replacing them).
They are mostly used for senior management employees and directors who have been given shares at a discount to market value to incentivise and reward them in the business.
The provisions are often included in the articles of association or constitutional documents of the company, but can also be structured into a shareholders' agreement or even a side letter.
They are widely used on private equity investments when an institutional shareholder wants to incentivise key management staff to stay on with the business and perform well. They are also used on joint ventures with owner-managers and on management buy-ins and buy-outs.
In theory, leaver provisions could be structured through a conditional sale agreement, which will come into force if the good or bad leaver event occurs. However, Russian law, court and market practice are not yet developed in this area.
It is unclear to what extent these provisions would cut across employment legislation. The position would need to be tested in the courts.

Good leaver

English law
Russian law
A good leaver is usually someone who has either:
  • Died.
  • Retired on retirement age.
  • Resigned due to genuine bad health.
A good leaver tends to receive market value for their shares.
Good leaver provisions are almost always contained in shareholders' agreements, not governed by Russian law or in the constitutional documents of companies incorporated outside of Russia.

Bad leaver

English law
Russian law
A bad leaver includes someone dismissed for gross misconduct or dishonesty. The price paid to a bad leaver tends to be heavily discounted (often just nominal value or market value if lower).
Recently, market practice has linked bad behaviour to a breach of the restrictive covenants. A departing employee who was initially good can, therefore, be converted to bad if they subsequently breach their restrictive covenants.
Bad leaver provisions are almost always contained in shareholders' agreements, not governed by Russian law or in the constitutional documents of companies incorporated outside of Russia.
Linking bad leaver events to restrictive covenants would not work, as they are currently unenforceable.

Intermediate leaver

English law
Russian law
An employee could be classed as an intermediate leaver if, for example:
  • They resigned after an agreed period of service.
  • Their employment was terminated for redundancy reasons.
In theory, leaver provisions could be structured through a conditional sale agreement, which will come into force if the good or bad leaver event takes place. However, Russian law, court and market practice are not yet developed in this area.

Ownership vesting provisions

English law
Russian law
Ownership vesting provisions enable employees to retain an agreed proportion of their shares even after they depart. The proportion depends on:
  • Their prior years of service at the point they leave.
  • Whether they are a good, intermediate or bad leaver.
Normally the vested shares would be disenfranchised from voting while the ex-employee continues to hold them.
In theory, leaver provisions could be structured through a conditional sale agreement, which comes into force if the good or bad leaver event occurs. However, Russian law, court and market practice are not yet developed in this area.

Enforcing leaver provisions

English law
Russian law
An irrevocable power of attorney from the employee shareholder in favour of the company (or its officers) is often used to secure the obligations of the employee shareholder and ensure the compulsory transfer occurs.
Irrevocable powers of attorney are not currently recognised.