MIP Bad Leaver Buyback Process

You are a senior corporate and employment solicitor in England and Wales with expertise in management incentive plans (MIP), employee share schemes, and leaver provisions. You understand the legal mechanics of compulsory share transfers, valuation methodologies, and timing requirements under English law.

When extracting bad leaver buyback processes:

• Identify who determines "bad leaver" status (board, investor, defined events)
• Note the valuation methodology (cost, fair value, nil, formula)
• Extract procedural steps and timeline (notice, valuation, payment)
• Check compliance with articles of association and Companies Act 2006
• If the company itself is to acquire the shares, flag that a purchase of own shares must comply with Part 18, Chapter 4 of the Companies Act 2006
• Identify parties' rights and obligations at each step
• Flag ambiguities or gaps in the documented process
• Always cite specific clause numbers from MIP documents
• Never assume standard processes - each MIP has unique provisions

Review the attached Management Incentive Plan (MIP) documents and extract the complete bad leaver share buyback process:

Documents to Review:

• MIP Rules / Share Option Scheme Rules
• Articles of Association (leaver provisions)
• Shareholders' Agreement (if contains buyback mechanics)
• Service Agreements / Employment Contracts (termination triggers)
• Share Purchase Agreement (if shares already issued)

Context:

• Company: [Private company limited by shares, England and Wales]
• Participant: [Management team member details if specific scenario]
• Share Type: [Ordinary / Growth Shares / Options]
• Vesting: [X% vested, Y% unvested]

Process Extraction:

(1) Bad Leaver Definition — Extract:

What Events Trigger Bad Leaver Status?

• Summary dismissal (gross misconduct, material breach, fraud)
• Resignation without good reason
• Material breach of employment duties
• Breach of restrictive covenants (non-compete, non-solicit)
• Criminal conviction
• Other defined bad leaver events

Who Determines Bad Leaver Status?

• Board decision (majority, unanimous, excluding interested directors?)
• Investor consent required?
• Automatic on summary dismissal?
• Dispute resolution process if contested

Document Reference:

• MIP Rules Clause [X]: [Quote exact definition]
• Articles Clause [Y]: [Quote]
• Service Agreement Clause [Z]: [Quote]

(2) Shares Subject to Buyback — Identify:

Unvested Shares:

• Treatment: [Automatically forfeit / Repurchased at nil / Board discretion]
• Timing: [Immediate on termination / At next vesting date]
• Payment: [Usually nil consideration]

Vested Shares:

• Treatment: [Compulsory transfer to a nominee, employee benefit trust or other shareholders / Purchase by the company of its own shares]
• Price: [Cost / Fair value / Nil / Formula]
• Timing: [Within X days of bad leaver determination]

Options (if applicable):

• Treatment: [Lapse immediately / Exercise period / Forfeit]
• Vested options: [Can exercise within X days or forfeit]
• Unvested options: [Lapse immediately]

(3) Valuation Methodology — Extract formula:

For Vested Shares:

• Formula: [Quote exact valuation provision]
• Common structures:
  • Nil or nominal (£0.01/share): Most punitive, total forfeiture
  • Cost (original subscription price): Return of capital invested
  • Lower of cost or fair value: Downside protection for company
  • Fair value with discount: E.g., "80% of fair value"
  • Formula-based: E.g., "based on latest accounts EBITDA × multiple"

Who Determines Fair Value?

• Board determination
• Independent valuer appointment
• Formula in articles/MIP rules
• Reference to recent transaction price

Valuation Date:

• Date of termination
• Date of bad leaver determination
• Date of buyback notice
• Last day of month/quarter after termination

(4) Step-by-Step Buyback Process — Create timeline:

Step 1: Termination / Bad Leaver Event

• Trigger: [Termination date / Event occurs]
• Responsible Party: [Employer dismisses / Employee resigns]
• Timeline: [Date of termination]

Step 2: Bad Leaver Determination

• Action: Board meeting to determine leaver status (good vs bad)
• Responsible Party: Board of directors (quorum requirements?)
• Timeline: [Within X days of termination / At next scheduled board meeting]
• Notice: [Must leaver be notified of determination?]
• Clause Reference: MIP Rules [X]

Step 3: Buyback Notice Issued

• Action: Company serves notice on leaver requiring transfer of shares
• Responsible Party: Company secretary / Board
• Content: Notice must specify:
  • Shares to be transferred (number, class)
  • Purchase price and calculation
  • Payment terms and timing
  • Deadline for execution of stock transfer form
• Timeline: [Within X days of bad leaver determination]
• Delivery: [By hand / Registered post / Email]
• Clause Reference: Articles [Y], MIP Rules [Z]

Step 4: Valuation (if applicable)

• Action: Determine fair value of vested shares
• Responsible Party: [Board / Independent valuer / Formula-based (no discretion)]
• Timeline: [Before notice / Within X days of notice]
• Leaver's Rights: [Right to challenge valuation? Dispute resolution?]
• Clause Reference: MIP Rules [X]

Step 5: Stock Transfer Form Execution

• Action: Leaver must execute stock transfer form
• Responsible Party: Leaver (seller)
• Timeline: [Within X days of buyback notice]
• Consequences if Refuses: [Board can execute on leaver's behalf? (check articles power of attorney)]
• Clause Reference: Articles [Y] (deemed power of attorney)

Step 6: Share Transfer Registration

• Action: Company registers transfer in register of members
• Responsible Party: Company secretary
• Timeline: [After receipt of executed transfer form and payment]
• Companies House: [File confirmation statement if needed; if the company bought its own shares, return to the registrar within 28 days - Companies Act 2006, s.707]
• Clause Reference: Articles [Z]

Step 7: Payment

• Action: Company pays purchase price to leaver
• Amount: [Per valuation / Nil / Cost]
• Timeline: [Within X days of registration / Simultaneous with transfer / Deferred]
• Method: [Bank transfer / Cheque]
• Set-off Rights: [Can company deduct loans, expenses, damages?]
• Clause Reference: MIP Rules [X], Articles [Y]

(5) Timeline Summary — Create table:

Total Timeline: [Shortest: X days] to [Longest: Y days]

(6) Leaver's Rights & Obligations — Extract:

Leaver's Obligations:

• Execute stock transfer form (or company can execute via power of attorney)
• Return share certificates (if certificated shares)
• Cease using any company title or email
• Comply with restrictive covenants (non-compete, non-solicit, confidentiality)

Leaver's Rights:

• Notice of bad leaver determination
• Valuation disclosure (if fair value applies)
• Right to challenge determination (if dispute resolution clause exists)
• Payment within specified timeline
• Set-off rights (if company owes leaver money)

Dispute Resolution:

• Can leaver challenge bad leaver determination?
• Can leaver challenge valuation?
• Process: [Arbitration / Expert determination / Court]
• Timeline for challenge: [Within X days of notice]

(7) Company's Rights & Powers — Extract:

Compulsory Transfer Power:

• Articles must grant company power to compel share transfer
• Typical provision: "Bad leaver shall be deemed to have irrevocably appointed the company as attorney to execute stock transfer forms"
• Check: Does Articles Clause [X] grant this power?

Set-Off Rights:

• Can company deduct from purchase price:
  • Outstanding loans to participant
  • Unpaid expenses or advances
  • Damages for breach of duties
  • Legal costs of buyback process
• Clause Reference: MIP Rules [Y]

Nominee Buyer:

• Can company nominate third party as buyer? (e.g., remaining management)
• Same price and terms apply to nominee
• Clause Reference: Articles [Z]

(8) Payment & Consideration Issues — Note:

Unvested Shares (usually nil consideration):

• Forfeiture = No payment to leaver
• Legal basis: Shares held subject to vesting conditions not met
• Tax treatment: [Refer to tax adviser - employment-related securities rules in Part 7 of the Income Tax (Earnings and Pensions) Act 2003]

Vested Shares:

• If price = Nil: Leaver receives nothing (total forfeiture)
• If price = Cost: Leaver recovers original investment (no gain/loss)
• If price = Fair value: Leaver participates in value created

Deferred Payment:

• Is payment immediate or deferred?
• If deferred: [Payment schedule, interest, security]
• If the company is the buyer: shares must be paid for on purchase, subject to the exception for employees' share schemes (Companies Act 2006, s.691)
• Risk: Company may not be able to pay (insolvency risk)

Withholding:

• PAYE/NICs if buyback treated as employment income
• Company must withhold and remit to HMRC if applicable

(9) Common Issues & Gaps to Flag — Identify:

Issue 1: Ambiguous Bad Leaver Definition

• Problem: "Gross misconduct" not defined
• Risk: Dispute over whether termination qualifies as bad leaver
• Solution: Require investor consent for bad leaver determination

Issue 2: Valuation Methodology Unclear

• Problem: "Fair value as determined by board" without guidelines
• Risk: Leaver disputes valuation, delays process
• Solution: Specify valuation methodology (e.g., "latest accounts NAV × 0.8")

Issue 3: No Timeline for Buyback Notice

• Problem: MIP silent on when company must serve buyback notice
• Risk: Indefinite uncertainty for leaver
• Solution: Add "within 30 days of bad leaver determination"

Issue 4: Power of Attorney Not in Articles

• Problem: MIP says company can execute transfer, but articles don't grant power
• Risk: Leaver can refuse to sign, blocking buyback
• Solution: Amend articles to include deemed power of attorney

Issue 5: Payment Terms Vague

• Problem: "Company shall pay the purchase price" without timeline
• Risk: Company delays payment indefinitely
• Solution: Specify "within 10 business days of registration"

Issue 6: Set-Off Rights Unclear

• Problem: Can company deduct loans/expenses from purchase price?
• Risk: Dispute over net amount payable
• Solution: Clearly state set-off rights in MIP rules

(10) Worked Example — Provide scenario:

Scenario:

• Participant: Jane Smith, CFO
• Shares: 100,000 Ordinary Shares (60,000 vested, 40,000 unvested)
• Original cost: £0.10/share (£10,000 total invested)
• Termination: Resigned without notice (bad leaver event)
• Date: 15 January 2025

Buyback Process Timeline:

15 January 2025 (Day 0): Jane resigns without notice

• Trigger: Bad leaver event (resignation without good reason)
• Action: Employment terminates effective immediately

20 January 2025 (Day 5): Board determines bad leaver status

• Meeting: Board meets, determines Jane is a bad leaver
• Resolution: Approve buyback of vested shares, forfeiture of unvested shares
• Notice: Board instructs company secretary to serve buyback notice

22 January 2025 (Day 7): Buyback notice served on Jane

• Notice Content:
  • 60,000 vested shares to be purchased at £0.10/share (cost) = £6,000
  • 40,000 unvested shares forfeited for nil consideration
  • Jane must execute stock transfer form within 14 days
  • Payment within 10 days of registration

25 January 2025 (Day 10): Valuation (if applicable)

• Determination: Purchase price = £0.10/share (cost price per MIP rules)
• Total: 60,000 × £0.10 = £6,000

5 February 2025 (Day 21): Jane executes stock transfer form

• Action: Jane signs stock transfer form for 60,000 vested shares
• Delivery: Sends to company secretary by email (PDF)

6 February 2025 (Day 22): Company registers transfer

• Action: Company secretary updates register of members
• Shares: 60,000 transferred to company nominee (for reissue to new CFO)

10 February 2025 (Day 26): Payment to Jane

• Amount: £6,000 (less any set-offs)
• Set-off: Company deducts £2,000 outstanding loan to Jane
• Net Payment: £4,000 paid by bank transfer

Result:

• Jane receives £4,000 (£6,000 purchase price - £2,000 loan)
• Jane loses 40,000 unvested shares (worth £4,000 at cost, or more at fair value)
• Total loss vs. if good leaver: £4,000+ (unvested shares forfeited)

Output Format:

Process Flowchart:

Bad Leaver Event → Board Determination → Buyback Notice → Valuation (if needed) → Stock Transfer Execution → Registration → Payment

Checklist for Company:

• Confirm bad leaver event occurred (check service agreement)
• Convene board meeting to determine leaver status
• Calculate vested vs unvested shares as of termination date
• Determine purchase price per MIP valuation methodology
• Prepare and serve buyback notice (include all required info)
• Monitor deadline for stock transfer form execution
• If leaver refuses, exercise power of attorney to execute transfer
• Register transfer in register of members
• Calculate any set-offs (loans, expenses, damages)
• Make payment within required timeline
• Update cap table and notify investor

Summary:

• Total timeline: [X] days from bad leaver event to payment
• Purchase price for vested shares: [£X] per share
• Unvested shares treatment: [Forfeit for nil]
• Key risks: [List]

Before running this prompt, upload the following to your AI tool's vault:

Essential:

• MIP Rules/Share Option Scheme Rules
• Articles of Association (leaver provisions and compulsory transfer mechanics)
• Service agreement or employment contract (termination and "cause" definitions)

Highly Recommended:

• Precedent MIP documents from similar PE/VC-backed structures showing bad leaver processes
• Your firm's standard MIP template with model leaver provisions
• Shareholders' agreement (if it contains additional buyback mechanics)

In your prompt, reference these: "Extract the step-by-step bad leaver buyback process from these MIP documents, compare the timeline against [PRECEDENT MIP] to identify any unusually long or short deadlines, and flag gaps in procedural protections using the precedent as a benchmark."

This allows the AI to benchmark valuation methodologies (cost vs fair value, nil vs discounted) against market-standard leaver provisions, identify missing procedural steps by comparing against comprehensive precedent processes, and assess whether timelines are reasonable and commercially practical based on how similar structures operate in precedent MIPs.

MIP Bad Leaver Buyback Process

Company: [UK SaaS Company] MIP: Management Incentive Plan adopted 1 June 2023 Documents: MIP Rules, Articles of Association, SHA

BAD LEAVER DEFINITION

MIP Rules Clause 8.1: "Bad Leaver" means:

• (a) Dismissal by the Company for Cause (as defined in service agreement)
• (b) Resignation by Participant without Good Reason
• (c) Material breach of restrictive covenants (non-compete, non-solicit) in Articles Schedule 5
• (d) Conviction of criminal offence involving dishonesty or fraud
• (e) Breach of fiduciary duties to the Company

Determination:

• Who decides: Board of Directors (by majority vote, excluding interested directors)
• Timeline: Board must make determination within 30 days of termination
• Notice: Company must notify Participant in writing of bad leaver determination within 5 business days

Dispute Resolution (Clause 8.3):

• Participant may challenge determination by notice to Board within 10 business days
• If disputed, matter referred to independent expert (senior employment KC)
• Expert's determination is final and binding

SHARES SUBJECT TO BUYBACK

Unvested Shares (Clause 9.1):

• Treatment: Automatically forfeit for nil consideration
• Timing: Effective on date of bad leaver determination
• No payment: Participant receives nothing for unvested shares

Vested Shares (Clause 9.2):

• Treatment: Compulsory transfer to Company or Company nominee
• Purchase price: Lower of (a) Cost or (b) Fair Value
• Timing: Transfer must occur within 60 days of bad leaver determination

Unvested Options (Clause 9.3):

• Treatment: Lapse immediately on bad leaver determination
• No exercise period: Cannot be exercised even if vested options

VALUATION METHODOLOGY

MIP Rules Clause 10.2: Purchase Price for Vested Shares

"The purchase price per share shall be the lower of: (a) Cost: the original subscription price paid by the Participant; or (b) Fair Value: the fair market value per share as determined by the Board, based on the Company's net asset value per the latest audited accounts, adjusted for any material events since the accounts date."

Worked Example:

• Participant subscribed at £0.10/share (Cost)
• Latest accounts show NAV = £0.25/share (Fair Value)
• Purchase price = £0.10/share (lower of cost and FV)
• Effect: Participant receives original investment back, no gain

If Fair Value < Cost:

• Example: Company performing poorly, FV = £0.05/share
• Purchase price = £0.05/share (lower of cost and FV)
• Effect: Participant loses 50% of investment

Valuation Date: Date of bad leaver determination (Clause 10.3)

STEP-BY-STEP PROCESS

STEP 1: BAD LEAVER EVENT OCCURS

• Trigger: Dismissal for Cause / Resignation without Good Reason
• Date: [Termination Date]
• Action: Employment terminates
• Responsible: Employer (dismissal) / Employee (resignation)

STEP 2: BOARD DETERMINATION (Within 30 Days)

• Action: Board meets to determine whether Participant is bad leaver
• Timeline: Within 30 days of termination (Clause 8.1)
• Quorum: 2 directors (excluding interested directors) per Articles
• Resolution: Board resolves that Participant is bad leaver
• Notice: Company Secretary serves written notice on Participant within 5 business days (Clause 8.2)
• Clause: MIP Rules 8.1-8.2

STEP 3: CALCULATE VESTED VS UNVESTED (Day 30-35)

• Action: Calculate vested shares as of termination date
• Vesting schedule: Per MIP Rules Schedule 1 (typically monthly/quarterly vesting)
• Example: If 48-month vesting, 25% after 12 months, then monthly
  • After 24 months: 50% vested, 50% unvested
• Responsible: Company Secretary / Finance team

STEP 4: DETERMINE PURCHASE PRICE (Day 30-35)

• Action: Apply valuation formula (lower of cost or fair value)
• Responsible: Board (if fair value determination needed)
• Timeline: Before serving buyback notice
• Clause: MIP Rules 10.2

STEP 5: SERVE BUYBACK NOTICE (Day 35-40)

• Action: Company serves formal buyback notice on Participant
• Content (Clause 9.4):
  • Number of vested shares subject to buyback
  • Purchase price per share and total consideration
  • Payment terms (within 10 days of registration)
  • Deadline to execute stock transfer form (14 days from notice)
  • Consequences of non-compliance (deemed transfer via power of attorney)
• Delivery: By email to Participant's last known address
• Clause: MIP Rules 9.4, Articles 33

STEP 6: PARTICIPANT EXECUTES STOCK TRANSFER FORM (Within 14 Days)

• Action: Participant signs and returns stock transfer form
• Timeline: Within 14 days of buyback notice (Clause 9.5)
• Delivery: To Company Secretary (email or post)
• If Refuses: Company can execute transfer on Participant's behalf via deemed power of attorney (Articles 33.2)

STEP 7: COMPANY EXERCISES POWER OF ATTORNEY (If Needed)

• Trigger: Participant fails to execute transfer within 14 days
• Action: Company executes stock transfer form as Participant's attorney
• Legal Basis: Articles 33.2 "deemed irrevocable power of attorney"
• Notice: Company must still notify Participant that transfer has been executed

STEP 8: REGISTER SHARE TRANSFER (Day 50-55)

• Action: Company Secretary updates register of members
• Entry: Remove Participant's shareholding, add Company (or nominee) as owner
• Companies House: No filing required for the transfer to the nominee unless confirmation statement due (had the Company bought the shares itself, a return would be due within 28 days under Companies Act 2006, s.707)
• Legal basis: Companies Act 2006, s.770 (a proper instrument of transfer must be delivered before the transfer is registered)

STEP 9: PAYMENT TO PARTICIPANT (Within 10 Days of Registration)

• Amount: Purchase price × number of vested shares
• Set-Offs (Clause 10.5):
  • Outstanding loans from Company to Participant
  • Unpaid expenses or advances
  • Damages for breach of restrictive covenants (if quantified)
• Method: Bank transfer to Participant's designated account
• Timeline: Within 10 business days of registration (Clause 10.4)
• Tax: Company must consider PAYE/NICs if buyback is employment-related

TIMELINE TABLE

Total Timeline: Approx. 60-65 days from termination to payment

LEAVER'S RIGHTS & OBLIGATIONS

Participant's Rights:

• ✅ Notice of bad leaver determination (within 5 days)
• ✅ Right to challenge determination (within 10 days, expert determination)
• ✅ Disclosure of purchase price calculation
• ✅ Payment within 10 days of transfer registration
• ✅ Set-off only for specific items (loans, expenses, quantified damages)

Participant's Obligations:

• ⚠️ Execute stock transfer form within 14 days
• ⚠️ Return share certificates (if certificated shares)
• ⚠️ Cease claiming to be shareholder after transfer
• ⚠️ Comply with restrictive covenants (ongoing obligation)

If Participant Breaches:

• Company can execute transfer via power of attorney (Articles 33.2)
• Company may claim damages for delay (legal costs, etc.)
• Participant may lose right to dispute valuation if doesn't challenge timely

WORKED EXAMPLE - JANE'S EXIT

Facts:

• Name: Jane Smith, Chief Financial Officer
• Shares: 100,000 Ordinary Shares
  • Cost: £0.10/share (£10,000 invested)
  • Vesting: 60,000 vested, 40,000 unvested (as of termination)
• Termination: 15 January 2025 (resigned without notice - bad leaver)
• Fair Value: £0.25/share per latest accounts
• Outstanding Loan: £2,000 from Company to Jane

Timeline:

15 Jan (Day 0): Jane resigns without notice (bad leaver event)

10 Feb (Day 26): Board determines Jane is bad leaver

• Board meeting: Resolve Jane is bad leaver (resignation without good reason)
• Notice served on Jane: 12 February 2025

12 Feb (Day 28): Company calculates vested shares and valuation

• Vested: 60,000 shares
• Unvested: 40,000 shares (forfeit for nil)
• Purchase price: Lower of cost (£0.10) or FV (£0.25) = £0.10/share
• Total consideration: 60,000 × £0.10 = £6,000

15 Feb (Day 31): Buyback notice served on Jane

• Notice content: Transfer 60,000 shares at £0.10/share = £6,000
• Deadline: Execute stock transfer by 1 March (14 days)

28 Feb (Day 44): Jane executes stock transfer form

• Jane signs and emails stock transfer form to Company Secretary

1 Mar (Day 45): Company registers transfer

• Company Secretary updates register: 60,000 shares transferred to Company nominee

11 Mar (Day 55): Payment to Jane

• Gross amount: £6,000
• Less: Outstanding loan: -£2,000
• Net payment: £4,000 (paid by bank transfer)

Result:

• Jane receives: £4,000 (£6,000 purchase price - £2,000 loan)
• Jane loses: 40,000 unvested shares (worth £10,000 at fair value, or £4,000 at cost)
• Total loss vs. good leaver: £10,000+ (unvested shares would have vested and been worth more)

KEY RISKS & GAPS IDENTIFIED

Gap 1: Ambiguous "Good Reason" Definition

• Issue: "Resignation without Good Reason" triggers bad leaver, but "Good Reason" not defined in MIP Rules
• Risk: Dispute over whether resignation qualifies (e.g., constructive dismissal)
• Recommendation: ✏️ Add definition of "Good Reason" (e.g., material reduction in salary, relocation >50 miles)

Gap 2: Fair Value Determination Unclear

• Issue: "Fair market value...as determined by the Board" gives Board full discretion
• Risk: Participant disputes Board's valuation, delays buyback
• Recommendation: ✏️ Specify valuation methodology (e.g., "NAV per latest audited accounts")

Gap 3: No Timeline for Board Determination

• Issue: MIP says Board "shall" determine within 30 days, but no consequence if delayed
• Risk: Indefinite uncertainty for Participant
• Recommendation: ✏️ Add default provision: "If Board fails to determine within 30 days, Participant deemed good leaver"

Gap 4: Set-Off Rights Overly Broad

• Issue: Clause 10.5 allows set-off for "any amounts owing to Company" - undefined
• Risk: Company could claim vague "damages" and reduce payment to nil
• Recommendation: ✏️ Limit set-offs to: (a) outstanding loans, (b) unpaid expenses, (c) quantified damages for breach of restrictive covenants