A management package, also known as a « ManPack », is an essential tool for motivating, sharing value creation and retaining key managers in mid-sized companies (MSEs) and small and medium-sized enterprises (SMEs). This tool aims to involve key managers and employees in the company’s growth by aligning the interests of shareholders, managers and key employees. It is widely used by investment funds to redistribute part of the value created (i.e. a portion of future profits).
The management package offers beneficiaries the opportunity to share in future earnings and, more importantly, to have access to the company’s capital. However, the valuation and benefits of a management package can be complex to understand because of the diversity of legal tools and regulations.
Commonly used tools include Preference Shares (ADP), Free Share Allocations (AGA), Stock Warrants (BSA and BSPCE) and Stock Option Plans (SO).
Companies and beneficiaries must consider these different mechanisms and constraints associated with these instruments, some of which are granted for valuable consideration and others for free. However, the fact that these instruments are free of charge has a cost for the company. If this cost is not assumed, the tax authorities may consider them to be a form of remuneration for managers or key employees.
Although losses can occur, management packages offer significant opportunities for gains and incentives, which help to attract and retain new talent. However, valuing management packages and carrying out the associated work, particularly for unlisted companies, is complex. Valuation models, anticipation of the vesting horizon, non-transferability and illiquidity provisions and other factors can make this difficult.
It is also important to note that the tax authorities may requalify management packages if they consider that the beneficiary did not take any financial risk when they were put in place. This could result in taxation of the gain and an adjustment of the company’s social security contributions. It is therefore essential to seek specialist advice when putting these tools in place.
At a glance, most known and used management packages in France are the following :
- “Actions de preference” (ADPs)
Issuing preference shares can be an effective way to incentivize managers and align their interests with those of the company. By granting managers preference shares, they become more invested in the company’s financial success because their financial outcomes are directly tied to company performance.
If the preference shares include a convertible feature, this could provide managers with a significant upside if the company performs well. If the company’s value grows, managers can convert their preference shares into ordinary shares, and sell them at a profit.
On the downside, because preference shares often come without voting rights, managers receiving these shares won’t have a direct influence on company decisions through voting. However, in many cases, the financial incentive may outweigh the lack of voting rights, especially when managers already have decision-making power by virtue of their positions within the company.
It’s important to note that the specific terms and conditions of preference shares can vary widely from company to company, and they are often tailored to suit the specific needs and circumstances of the company issuing them. Therefore, it’s essential to review the specific terms of any preference shares carefully and if needed to include it in a shareholder’s agreement.
- “Attribution d’actions gratuities” (AGAs)
The AGAs represent an effective means of distributing shares to a company’s employees and corporate officers for free but subject to certain conditions. These shares come with predetermined acquisition and holding periods that cumulatively should not be less than two years. Also, AGAs adhere to individual and collective ceilings and fall under a regulated tax and social regime. This fiscal regulation has made them relatively attractive under the flat tax regime.
- “Bons de souscription de parts de créateurs d’entreprise” BSPCEs
The BSPCEs, allocated (generally for free) by any company liable for corporate tax, grant the beneficiary the right to subscribe a predetermined number of shares at a fixed price. This mechanism aligns the interests of the company’s managers and employees and its implementation can be tied to various factors, including the duration of presence or achievement of individual and/or collective performance criteria.
- Paid Mechanisms: Ordinary Shares or Preference Shares, and BSAs
Paid mechanisms, such as ordinary shares or preference shares, and BSAs, add to the variety of value-sharing options. However, the effectiveness of these mechanisms greatly hinges on the existing legal regime, the nature of risk undertaken by the manager, and the acquisition context and market value of the instrument. BSA instrument have been recently challenged by French Court from a tax standpoint, as French court considers that in the event the manager/employee does not take any risk it cannot be considered as a capital gain but rather as a bonus that must be taxed as a salary.
MFL registered lawyers remain at your entire disposal to answer your queries regarding management package issues. MFL will provide you with the best lawyers to handle your project and provide you with accurate advices.