LUXEMBOURG Law and Practice Contributed by: Johan Terblanche, Baptiste Aubry and Michelle Barry, Maples Group
to be able to do a debt push-down would be 66.6% of voting rights in an SA and 75% in a SARL. 7.7 Irrevocable Commitments It is quite common for the bidder to seek irrevocable commitments from the principal shareholders of the target to tender or vote. However, there is no provision in Luxembourg law ensuring the enforceability of such commitments, so damages could ultimately only be awarded in the event of a breach of the commitment – compulsion via a mandatory injunction is not possible. The negotiation of such commitments in the case of a voluntary takeover offer is usually undertaken at the pre-bid stage. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of the management team is a common feature of private equity transactions in Luxembourg, but the level of incentive would gener - ally be limited to between 5% and 20% of the equity, depending on the size of the transaction, the indus - try, the specific company’s growth prospects, and the negotiation between the private equity investors and the management team. 8.2 Management Participation Management participation in private equity transac - tions is typically structured via both sweet equity (ordi - nary shares and/or options issued at a lower price to management to create motivation to increase the value of the acquired company with the incentive of a higher price on exit) and institutional strip (corre - sponding to the cash injected by the private equity investors to acquire the target, although key manage - ment may also be required to invest in the target to bind their interests to those of the private equity inves - tors) in Luxembourg-based deals, depending in the main upon the private equity strategy. In the same way, managers could be offered ordi - nary equity, but with limited participation that would not trigger any blocking thresholds in terms of deci - sions or preferred equity deprived of voting rights but granted incentive financial rights. In the latter case, the preferred instrument used would be preferred shares
with no voting rights and preferred rights to dividend. This structure enables managers to share in the finan - cial success of the company while maintaining a clear separation between ownership and control. The use of these instruments is subject to ongoing evolution, reflecting changes in market conditions, regulatory frameworks and the strategic objectives of private equity investors. It is important to note that the specific terms and conditions of sweet equity and institutional strip arrangements, as well as the use of preferred instruments, can vary significantly from one transaction to another. These structures are often complex and tailored to the unique circumstances of each deal, taking into account the objectives of all parties involved. 8.3 Vesting/Leaver Provisions The typical leaver and vesting provisions for manage - ment shareholders would grant options that would vest with a minimum period of three years (sometimes extended to five years). The award agreement may contain performance goals and measurements such as sales, earnings, return on investment or earnings per share. The exercise period is generally quite long (up to ten years for certain structures). However, all vested-but-not-exercised rights would be lost as soon as the holder ceases to be employed by the company or an affiliate. 8.4 Restrictions on Manager Shareholders In terms of restrictive covenants agreed to by manage - ment shareholders, non-compete and non-disparage - ment undertakings are often part of the contractual arrangements. However, enforcement can sometimes be difficult, with prohibitive injunctions generally avail - able only under limited circumstances. Non-compete clauses, in any event, need to be limited to the Luxembourg territory, and for a limited period of time that needs to be agreed as reasonable. A non- compete clause that would prevent the manager from being able to work because it is too broad, either in scope or in time, will not be enforceable. Non-solici - tation clauses are less strictly regulated and are there - fore often included and more liberally applied.
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