FRANCE Law and Practice Contributed by: Idris Hebbat, Camille Perrin, Franck Vacher and Nicolas Menard-Durand, C-Level Partners
• Effective date – These measures apply to trans - fers, sales and leases conducted from 15 February 2025, including securities acquired, subscribed or granted prior to that date. • Temporary provisions – The 10% employee contri - bution applicable to the portion of the gain exceed - ing three times the ratio is currently temporary and will apply to transactions carried out no later than 31 December 2027. This new framework aims to provide greater certainty for structuring management incentive schemes while maintaining favourable treatment for gains that align with genuine company performance. Nevertheless, the law is still unclear on many aspects, and advisers are waiting for the tax administration’s comments on this new law. 8.3 Vesting/Leaver Provisions In private equity transactions involving management participation, good and bad leaver provisions are usu - ally set out in the shareholders’ agreement. In general, a manager is deemed to be a “good leaver” if they leave the company for one of the following rea - sons: • death; • physical or mental incapacity; or • departure approved by the investors. In this case their shares will be transferred back to the portfolio company or the private equity investors, as the case may be, at fair market value. On the contrary, if the relevant manager is deemed to be a “bad leaver”, their shares will be transferred at a price lower than the fair market value. In general, a manager is considered to be a “bad leaver” if they leave the company: • for any reason other than death, physical or mental incapacity, or upon authorisation by private equity investors; or • in the case of gross negligence, wilful misconduct, breach of the shareholders’ agreement or, in cer - tain cases, under-performance.
In both cases, managers are required to sell their shares back to the company or the private equity investors. To this end, each manager must grant a call option to the private equity fund. Since 2021, market practice tends to abandon the good and bad leaver distinction since it may increase the risk of requalification of the capital gain into salary. The French Finance Law for 2025 provides clarifica - tion regarding the nature of capital gains derived from management incentive plans (MIPs) (see 8.2 Manage- ment Participation ), and we may see a return to the good and bad leaver distinction. 8.4 Restrictions on Manager Shareholders Manager shareholders often play a dual role, as they are both shareholders and employees or service pro - viders of the portfolio company. Given this situation, manager shareholders are subject to certain obliga - tions deriving directly from their status. Such obliga - tions usually include non-solicitation, non-competition and confidentiality obligations, which are set out in both the shareholders’ agreement and the employ - ment contract (or service agreement) signed by the relevant manager. Under French law, the non-competition undertak - ing must be proportionate to the legitimate interests involved. To this end, these commitments are limited in time and space and to strictly defined activities. Moreover, if the manager who undertakes such a commitment is an employee, the non-competition undertaking must be stipulated in the employment contract and must be remunerated. 8.5 Minority Protection for Manager Shareholders In the case of a majority LBO, the manager share - holders of a company do not have specific rights that would allow them to influence certain decisions that would commit the company or the structure of the company itself. Nor, for the majority of deals, do they have specific rights to influence the capital ownership or the exit of the investor. Indeed, the main purpose of managers taking a stake in a company is to give employees an interest in the company’s results. More - over, certain important decisions need to be approved by the investors.
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