Partner obligation to work (key man) and exiting a company (good leaver/bad leaver)
Partners usually undertake to work full-time for the company and to seek the consent of the investors if they wish to engage in some other business besides working for the company. The roles of each partner are typically specified in a shareholder agreement.
The employment and termination of employment of a partner is usually agreed by means of good leaver and bad leaver clauses. A partner leaving the company is leaving for a good reason (good leaver) if
a) the death of the partner’s spouse, child or close family member or long-term illness prevents the partner from carrying out his or her obligations in accordance with the employment or service contract;
b) the employment or service agreement of the partner is terminated or cancelled on any other grounds other than under the Employment Contracts Act;
c) the partner terminates or cancels his or her employment or service contract under circumstances where an employee is entitled to terminate an employment or service contract for employer-related reasons under the Employment Contacts Act.
Leaves the company for an acceptable reason (Employment Contracts Act, serious illness, etc.)
Leaves the company for any other reason (“not interested” attitude).
A bad leaver has to sell his or her share usually at the purchase price or at a mathematical value, depending on which is lower, and a good leaver at the market rate or the subscription price, depending on which is higher. The obligation to work and selling commitments are usually tied to a vesting clause.
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