IRELAND Law and Practice Contributed by: Enda Garvey, Brian McCloskey and Robert Maloney Derham, Matheson LLP
8.3 Vesting/Leaver Provisions Management equity will typically be subject to both vesting and good-leaver/bad-leaver provisions, whereby – in circumstances where a member of the management team leaves the business prior to an exit – such shares can be repurchased from the relevant manager at a nominal or agreed price. The valuation will depend upon the circumstances in which the man - ager leaves (ie, whether the manager is a good leaver, a bad leaver or a very bad leaver). Good-leaver/bad-leaver provisions will determine the amount payable to the departing participant. A “good leaver” will commonly obtain a fair market value for their shareholding on exit, whereas a “bad leaver” typically obtains the nominal value of their sharehold - ing. It is common practice for such vesting provisions to include claw-backs whereby an individual who has been designated as a “good leaver” may be required to reimburse their windfall for subsequent breaches of restrictive covenants or other material provisions. Historically, leaver provisions were drafted heavily in favour of the private equity fund, including an expan - sive definition of “bad leaver”. However, as compe - tition for suitable assets increases, it is increasingly common for private equity funds to have a more management-friendly leaver provision whereby a “bad leaver” is defined with reference to specific circum - stances, such as: • breaches of restrictive covenants; or • defined events of default. 8.4 Restrictions on Manager Shareholders Management shareholders are generally subject to restrictive covenants in Ireland, including non-com - pete, non-solicitation and non-disparagement under - takings. Such restrictive covenants can be included in both the equity package and the employment con - tracts to be entered into as part of completion. How - ever, such provisions should be carefully drafted in light of the delicate balancing act between disruption of competition coupled with the right to earn a liveli - hood and the protection of a legitimate business inter - est. The basic position is that restrictive covenants are, prima facie, unenforceable for being unduly in restraint of trade – unless the party seeking to rely on
them can demonstrate that the restrictions in question are no more than what is strictly necessary to protect a legitimate business interest and are not otherwise contrary to the public interest. In general, in Ireland, a non-compete is unlikely to raise concerns if: • it is limited to a duration of two years (where good - will is being transferred); • it is limited to a duration of three years (where know-how also transfers); and • it relates strictly to the business being acquired and is limited to the territory in which that business already operates. 8.5 Minority Protection for Manager Shareholders Management does not typically enjoy veto rights over the day-to-day or strategic decisions of the company, which: • in the case of the former, will be determined by the board; and • in the latter case, will be reserved for the investor through reserved matters. Depending on the structure of the agreement in place between the investor and management, it is often the case that certain limited matters will be reserved specifically for management either through specific reserved matters or by requiring unanimous board approval (where management is represented on the board). Typically, but not always, management is awarded pre-emption rights to avoid dilution. Ratchet mecha - nisms are also utilised to vary the amount of equity held by management and can act as an anti-dilution protection where more sweet equity is issued to other managers at a later stage. It is uncommon in Ireland for management to be awarded a right to control or influence the exit of the investor, unless management is awarded a controlling percentage of strip equity in the ultimate holding com - pany. The only exception to this is where the private equity investor is participating in a joint venture or the
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