AUSTRIA Law and Practice Contributed by: Horst Ebhardt, Philipp Kapl, Hartwig Kienast and Matija Bernat, Kinstellar
8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of management is a common feature of PE transactions in Austria. Structures typi - cally involve direct or indirect co-investment by man - agement through management incentive plan vehicles. The level of equity allocated to management usually depends on transaction size, sponsor philosophy and the management’s role. These structures must com - ply with Austrian corporate, tax and employment law, and are often implemented through Austrian or foreign holding vehicles to optimise flexibility and enforceabil - ity. From a tax perspective, management equity may give rise to income taxation for employees at the time of grant (subject to progressive rates of up to 55%) or to capital gains taxation upon the disposal of shares (generally 27.5% for individuals), with structures fre - quently designed to achieve tax efficiency. 8.2 Management Participation Management participation is commonly structured via sweet equity in PE transactions. The management typically invests through a dedicated vehicle, usually a GmbH, and acquires a minority share at a discount, benefitting from the upside on exit. Sweet equity structures often include ratchets, vest - ing and leaver provisions, and are implemented via contractual agreements, particularly in GmbH settings where statutory flexibility is limited. PE funds typically use preferred instruments to secure downside protection, including shareholder loans, preferred shares in stock companies (AG) or contrac - tual liquidation preferences. 8.3 Vesting/Leaver Provisions Vesting provisions are common in Austrian PE trans - actions involving management equity. Standard vesting schedules include time-based and/or per - formance-based vesting, typically over three to five years. Leaver provisions are also market standard and distinguish between good leavers (eg, death, disabil - ity, termination without cause) and bad leavers (eg, resignation, termination for cause). Bad leavers usu - ally forfeit their unvested equity and may be required to sell vested shares at a discount or nominal value.
Good leavers typically retain vested equity or sell at fair market value. Such provisions are implemented via shareholders’ agreements and must comply with Austrian employment and corporate law, particularly regarding enforceability and proportionality. 8.4 Restrictions on Manager Shareholders Customary restrictive covenants for management shareholders in Austria include non-compete and non-solicitation undertakings. These are typically included in both the employment agreement and the transaction agreement. Enforceability is sub - ject to Austrian employment and competition law: post-termination non-compete clauses in employ - ment contracts are limited to one year and must be appropriately narrow in scope and geography, and must be reasonably compensated. In the context of transaction agreements, broader non-solicitation and non-compete clauses are commonly used where the individual holds a significant shareholding and the restrictions are proportionate. Such clauses are gen - erally enforceable, subject to overarching principles of proportionality and fairness (contra bonos mores). Non-disparagement undertakings are rarely used. 8.5 Minority Protection for Manager Shareholders Minority protection for management shareholders is typically achieved through contractual rights in shareholders’ agreements rather than through equity ownership alone. Management may have limited veto rights over key matters (eg, changes to the holding structure, issuance of new shares, amendments to the equity plan). Strong veto rights in the day-to-day business are uncommon and depend on the relative equity stake and negotiation leverage. Anti-dilution protection (eg, full-ratchet or weighted average) may be granted, particularly where management makes a significant co-investment. However, management usually does not have control over the exit; drag- along rights favouring the PE sponsor are standard. In some cases, management may negotiate informa - tion or consultation rights in relation to exit timing or process, but not veto rights.
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