For many buyers, it is important that a good helmsman is left behind after the acquisition. As a selling DGA, this is often yourself. Private equity parties and investment funds in particular often require that you remain associated with the company as a director for a certain period of time. It is wise to lay down the conditions for this well in advance.
Obligation to stay on is not without obligation
Only make agreements that you are certain you are willing and able to commit to. A buyer who is keen on this will want to include a clear, hard clause in the purchase agreement to the effect that the seller will continue working as a director for one or more years. If you stop earlier, the company may suffer, perform worse and even lose value. This in turn can lead to a claim from the buyer, who believes that his shares have lost value because the agreements made have not been fulfilled. An early departure can also be linked to the right to (part of) the earn-out, if there is one.
Extra attention with pre-exit
Clear agreements about a stay-behind obligation are extra important if you, as the seller, retain a minority interest in the business and thus remain a shareholder. This also applies if you reinvest at a higher level in the group to which you sell a business (a roll-over). Almost always, early leaver and bad leaver agreements are then made, which mean that you have to offer your shares at a "penalty discount" if you leave earlier than agreed (early leaver) or are forced to leave because of serious reproach (bad leaver).
Discuss possible scenarios and make clear agreements.
The financial consequences of an early leaver or bad leaver situation can be substantial. Therefore, think carefully about situations that may arise and make appropriate arrangements. You can think about:
- possible exceptions that justify an earlier departure (without "penalty discount"), such as disability, informal care or a disturbed relationship caused by buyer;
- The possibility of early dismissal by the buyer and the consequences of this; and
- An anti-embarrassment clause (anti-speculation clause), whereby in the event of a forced sale, you benefit from a later, more lucrative exit.
Standard clauses are rarely standard
It is often said that these types of agreements and contract provisions are "standard" and cannot be changed. This is rarely actually the case in the case of a takeover. The situations in which someone does or does not qualify as an early leaver or bad leaver can be described in countless ways. Although there are more or less fixed lower limits (dismissal for fraud or deceit will almost always result in the qualification "bad leaver"), above that there is certainly room for negotiation. By no means every urgent reason for dismissal need automatically lead to a bad leaver qualification.
Take-away
An obligation to stay on does not have to be a burden in itself, but it is important to realize that a clear commitment is actually enforceable. Therefore, think carefully in advance about the scenarios in which you are and are not willing to continue and what financial consequences are acceptable in the event the cooperation ends prematurely or on bad terms.
