Game over for “all-or-nothing” bad leaver clauses? How one ruling recalibrates the balance of power

What is this about? The “all-or-nothing” trap

In the world of start-ups and investments they are standard: “bad leaver clauses” in shareholders’ agreements. They are intended to protect investments and to tie founders to the start-up. Yet the hard reality often looks like this: founders are not always the best managers, and their removal as managing director frequently triggered a bad leaver event – and all the shares they had painstakingly earned were to be gone for a symbolic amount. A recent ruling of the Kammergericht Berlin (Higher Regional Court, case no. 2 U 15/25) of 19 May 2025 now puts a stop to this practice and forces both sides to rethink.

The reasoning in detail: why many bad leaver clauses could be invalid

The ruling concerned precisely this constellation: in its clause setting out the circumstances under which founders lose their shares (vesting clause), the shareholders’ agreement referred to a bad leaver event. In the case at hand, its requirements were met where (a) a managing director is removed for good cause within the meaning of section 626 of the German Civil Code (BGB), and (b) it was further qualified to the effect that the removal is based on intentional conduct or a criminal offence. The consequence: the founder had to surrender his shares at nominal value – a quasi-total loss.

It is exactly this that the Kammergericht Berlin held to be disproportionate and therefore invalid. The court’s persuasive reasoning: the threshold for removing a managing director is significantly lower than for excluding a shareholder. For a removal it is sufficient that the cooperation has become “unreasonable”. The compulsory withdrawal of shares, however, must always be the last resort (ultima ratio) and requires, for instance, a sustained and gross breach of shareholder duties or a profound falling-out among the shareholders that was at least predominantly caused by the shareholder to be excluded.

By linking both events – removal and loss of shares – the requirements chosen here for vesting leave no room for any other, milder and more proportionate measure (for example a warning in respect of the misconduct or a temporary exclusion). This lack of differentiation renders the clause invalid.

What the ruling means for founders and investors

This ruling is not a niche legal topic – it is a wake-up call with tangible economic consequences.

For founders & start-ups

• More protection for your equity: The ruling strengthens your position. You are no longer left defenceless against a mechanism that punishes operational misconduct with the loss of your shares at the same time.
• A better negotiating position: Use this knowledge! In negotiations with investors you can insist on more differentiated and fairer provisions. A blanket “removal = loss of shares” clause should no longer be accepted.

For investors (VCs, business angels, family offices)

• Caution – legal risk! Standard sets of documents may contain invalid clauses. In the event of a dispute this means: the clause falls away entirely, and the unwanted shareholder stays on board with all of their shares. Your investment is therefore less well protected than you thought.
• The need for intelligent structuring: The “sledgehammer” approach no longer works. Protecting the investment now requires more precise and more intelligent drafting that withstands judicial review.

The solution: smart clauses

So how can shareholders’ agreements now be drafted in a legally sound and, at the same time, commercially sensible way? It is about balancing the interests of both sides fairly. Instead of a rigid coupling, graduated and differentiated provisions are the way forward:

1. A clean definition of the “bad leaver”: The reason for departure must be clearly defined. The chosen triggers should be ones that genuinely justify a permanent withdrawal of shares.
2. Graduated legal consequences: The consequences must fit the breach. What lends itself here is a gradation of consequences and of the compensation for the shares, based on the severity of the breach.
3. A “may” provision as the royal road: To further counter the court’s criticism (the absence of any scope for the shareholders to weigh the matter), a provision is recommended that grants the remaining shareholders a right of redemption while at the same time leaving room for a milder measure.

What founders and investors should do now

The Kammergericht Berlin ruling ends the era of undifferentiated bad leaver clauses. It is a clear plea for proportionality and fairness. Founders gain more security for their life’s work, and investors are forced to design their protective mechanisms more intelligently – and thus, ultimately, more robustly.

For both sides the same applies: off-the-shelf standard contracts are a high risk. A tailored shareholders’ agreement that is legally sound and commercially thought through is not a cost factor, but the decisive foundation for a stable and successful partnership.

This article has been provided by Dr. Björn Bronger, MBA for information purposes only, in order to give you general information and a general understanding of the law, and not to provide you with specific legal advice. Receipt of this communication alone does not create an attorney-client relationship between you and Dr. Bronger. The content of this article should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.