ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
This clause is a very important balance between providing the bidder with security and allowing the shareholder to fulfil its own fiduciary duties to its cli - ents or investors. In some cases, the agreement may also give the first bidder a “match right”, which gives them a certain amount of time to match the better offer before the “out” is called for. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Management equity incentives are very common and almost standard in Italian PE deals; they are intended to improve performance, expand the company and work towards a successful exit. Aligning the interests of the management team with those of the investors is crucial for creating value. Indeed, management equity is usually structured in a way that causes manage - ment to get the return on the investment only if the PE fund achieves its target returns (so-called hurdle). This structure is also intended to ensure that the return of equity incentive is taxed as financial income (and not as employment remuneration). The amount of management equity depends on the size of the deal, how senior the management is, and the type of business. For tax reasons, an equity-based management incentive plan requires an investment by the management equal to or higher than 1% of target’s equity value at the time of the management’s investment. The PE fund usually decides how to allo - cate the equity-based incentive among the manage - ment team also on the basis of seniority, role, and past performance of managers and CEO’s inputs. The CEO and other top executives usually get a bigger share of the equity incentive, while other important managers get a smaller share. 8.2 Management Participation Management’s participation in Italian PE deals is nor - mally structured so that the interests of the manage - ment team and the PE fund are aligned and the risks and returns of both parties are clear. In particular, management’s return is proportional to its investment up to a certain threshold (ie, a hurdle rate where the PE meets its target money multiple and/or internal rate of return). As soon as such threshold is met by the PE
fund, management return increases significantly and independently from the size of its initial investment (which is where the name “sweet” equity comes from). In essence, this structure is intended to ensure that the management team only gets an incentivised return if the fund’s own target returns are also met. Preferred instruments are also used (although less frequently) in Italian PE investment, and they are intended to create a more articulated capital structure where the PE fund (and other investors) invest both in preferred equity/shareholders’ debt (often with senior and capped returns) and in ordinary equity. The multi-layered capital structure is an important fea - ture of PE deals because it facilitates the alignment of Vesting provisions are very common for management equity in PE deals in Italy in order to retain the man - agement team members by linking their equity return to their continuing employment relationship with the PE portfolio company. The vesting schedule usually lasts five years and sometimes starts with a “cliff” (eg, no shares vest for the first year) and then continues with monthly or quarterly vesting. Performance-based vesting is another (perhaps rar - er) type of vesting that is based on a certain perfor - mance metric (eg, achieving certain level of EBITDA or increasing its enterprise value). Leavership provisions are common too, in order to protect the company from any speculative attitude and regulate the loss or reduction in the manage - ment’s incentive if the employment relationship with the PE portfolio company is terminated. Leavership provisions are triggered by the following occurrences: • “good leaver” status (eg, death, disability, termina - tion without cause, or retirement); • “medium leaver” status, consisting generally in an underperformance of the portfolio company against the business plan; or interest in a waterfall of returns. 8.3 Vesting/Leaver Provisions
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