I. Background

Leaver clauses in shareholders’ agreements are a common mechanism, particularly in the start-up and venture capital sector, to ensure the continued involvement of founders in the company’s operational business. Shareholders’ agreements define certain events (leaver events) which, if they occur with respect to a founder, qualify that founder as a so-called leaver. This is usually linked to a call option or a similar mechanism stipulating that the leaver loses all or part of his or her shares in the company. In practice, a distinction is made between so-called “good-leaver” and “bad-leaver” events, depending on the cause of the leaver event. The legal consequences of good-leaver and bad-leaver events usually differ in the number of shares that the leaver must relinquish and the amount of compensation received. Bad leavers usually receive only minimal compensation, e.g., in the amount of the nominal value of the shares.
In the case before the KG, the relevant shareholders’ agreement designated the following events as bad leaver events: (i) termination of a founder’s service agreement as managing director for cause, (ii) non-renewal or termination of a service agreement as managing director by the founder without good cause, (iii) dismissal of the founder as managing director for cause within the meaning of section 626 of the German Civil Code (BGB), or (iv) resignation of the founder from the managing director position without cause.
In case any of these bad leaver events occurred before 17 May 2024, 25% of the founder’s shares were subject to a transfer obligation.
If, however, one of these bad leaver events occurred as a result of wilful misconduct on the part of the founder concerned or a misconduct to the detriment of the company or any of its shareholders relevant under criminal law, (i) all shares of the respective founder should be subject to the transfer obligation and (ii) the transfer obligation would apply for an indefinite period.
The consideration for the transferred shares was to be one euro per share.

II. Decision of the KG

The KG recognizes that, notwithstanding the “concentration principle” under section 3 para. 2 of the German Limited Liability Companies Act (GmbHG), contractual (i. e, falling under the law of obligations) side agreements to shareholders’ agreements, in particular bad leaver provisions, are generally permissible. According to the KG, bad leaver clauses are not “forced-exclusion”-provisions (Hinauskündigungsklauseln), as the other shareholders are not granted the right to exclude the respective founder from the company without objective reason.
However, according to the KG, bad leaver provisions are subject to content control (Inhaltskontrolle) and must, in particular, not violate public policy (gute Sitten) within the meaning of section 138 para 1 BGB. The KG held that the bad leaver provision in question constitutes such a violation of public policy:
The KG reasoned that the exclusion of a shareholder from the company interferes with the core area of membership rights and must (undisputedly) be a measure of ultima ratio. According to the court, a provision that results in exclusion from the company thus requires special justification and can, as a rule, only be agreed for a limited period. The clause in question does not adequately take this into account, as it links the dismissal of the managing director directly and without any time limitation to the obligation to transfer all shares. According to the KG’s ruling, this also applies where the shareholder’s own culpable breach of duty leads to exclusion.
The KG argues that, in the present case, the clause wrongly places dismissal from the management position and withdrawal of shares on the same level. The KG pointed out that cause for the dismissal and for the termination of a managing director’s service agreement already exists if, after weighing the interests involved and considering all the circumstances of the individual case, it has become unreasonable for the company to continue the managing director’s employment. According to the ruling of the KG, a milder measure (milderes Mittel) than the withdrawal of shares would be a removal of the founder from his position as a managing director.
The KG rejected the argument that the bad leaver provision applies indefinitely and to all shares only in cases of intentional misconduct by the founder concerned or criminal misconduct to the detriment of the company or one of its shareholders. The court argued that the clause already deems a single instance of such misconduct sufficient. This one-time misconduct could also occur in the context of conditional intent (bedingter Vorsatz). The court further argued that the automatic link between the dismissal and the offer to transfer all shares of the respective founder left no room for a proportionate assessment by the shareholder majority.

III. Assessment

It is important to emphasize that the ruling does not call into question the general permissibility of vesting clauses, including bad‑leaver provisions, in shareholders’ agreements. Rather, the ruling recognizes that the loss of shareholder status can, in principle, be agreed. The KG lists cases in which there may be sufficient objective grounds for the involuntary loss of shareholder status. This is, e.g., the case in the event of a profound disagreement among the shareholders, which was caused at least predominantly by the shareholder to be excluded, without there being any ground for exclusion on the part of the shareholders initiating the exclusion proceedings. Accordingly, bad‑leaver events that may lead to exclusion can, in principle, be validly agreed.
The KG rather explicitly emphasizes that the specific clause under review, with its combination of (i) an unlimited term and (ii) the dismissal of the founder as managing director or termination of the service contract for cause automatically leading to a transfer obligation of all shares, does not take into account that the withdrawal of shareholder status must remain the last resort, the ultima ratio.
However, the KG’s suggested less severe alternative of revoking the founders position as manging director may, however, in practice conflict with the parties’ commercial interests, particularly in the area of start-ups. The purpose of leaver provisions is to keep founders motivated to remain active in the operational business of the company and thereby increase company value. Once a founder exits the executive role, both investors and remaining founders typically have little interest in retaining a passive shareholder who no longer contributes to value creation. From an investor’s perspective, such so-called “dead equity” is generally undesirable and can complicate future funding rounds.
The practical takeaway is that (bad) leaver provisions are subject to judicial review for proportionality. In particular, bad‑leaver provisions that may lead to the complete forfeiture of all shares will likely be permissible only in very limited circumstances under this case law.