Bad Leaver Provision Where Shares And Loan Notes Were Forfeited Was Found Not To Be Unconscionable Or A Penalty

The Claimant worked for a company that was acquired by way of a sale of shares. As a condition of the acquisition, the purchaser required that the seller provide equity to key employees to ensure continuity post-acquisition. The Claimant was therefore given a 2% shareholding.

The Claimant sold her shares to the new company pursuant to a share sale agreement which provided for both initial and deferred consideration. The deferred consideration included staged cash payments and an entitlement to earn-out shares and loan notes, which were subject to good leaver/bad leaver provisions.

A bad leaver included an employee who voluntarily resigned so they would forfeit their loan notes in whatever way the Remuneration Committee may determine in good faith, and would be required to sell back their share at the lower of acquisition cost or fair value.

The Claimant subsequently resigned and sought to challenge the bad leaver provisions by arguing breach of contract and unauthorised deduction from wages. It was claimed that the bad leaver provisions were unenforceable as they were (1) unconscionable, (2) in breach of the rule against penalties and (3) amounted to a contravention of the Modern Slavery Act 2015 as the covenant not to become a bad leaver amounted to forced or compulsory labour.

The EAT ruled that the Claimant could not bring a claim under the unauthorised deductions from wages provisions. The Employment Rights Act 1996 excluded claims for any payment to the worker otherwise than in his capacity as a worker. The shares and loan notes were provided to the claimant in her capacity as seller of shares, not worker.

The EAT held that there is a three stage test for setting aside an unconscionable bargain: (1) one party must have been at a serious disadvantage whether through poverty, ignorance, lack of advice or otherwise; (2) the other party must have exploited that disadvantage in some morally culpable manner, and (3) the resulting transaction must be...

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