NEW ZEALAND Law and Practice Contributed by: Ben Paterson, Cath Shirley-Brown and David Hoare, Russell McVeagh
8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of the management team (usu - ally by way of a management incentive plan; MIP) is a common feature of private equity transactions in New Zealand due to the desire to ensure manage - ment retain “skin in the game”. While each transaction can differ substantially, management will typically hold only a small level of equity ownership in the target, generally 5% to 15%. 8.2 Management Participation In New Zealand, management equity generally takes the form of options or loan-funded shares. Often, these will be realised via a cashless exercise mecha - nism in the event of an exit. Cash-funded investment by senior managers is also common. Preferred instruments are not typically used in man - agement equity structures (these are generally reserved for the private equity buyer), so management will usually be issued ordinary equity (or a separate class of equity with largely the same rights as ordinary equity). 8.3 Vesting/Leaver Provisions New Zealand leaver provisions generally contemplate “good” and “bad” leavers, consistent with other juris - dictions (eg, the United Kingdom and Australia). In most MIPs, a person will be designated as a “bad leaver” unless their employment is terminated with - out cause, or they die or are incapacitated. However, the board will customarily retain a discretionary right to permit management to be designated as a “good leaver” outside of the prescribed regime. It is common for MIPs to include vesting provisions, particularly where the participants are being issued equity in the form of either options or ordinary shares. In contrast to other jurisdictions, in New Zealand it is usual for management equity to vest on issuance; however, where the management equity being issued is options, typically such options will only become exercisable on an exit or on an exit where a specified value has been achieved.
8.4 Restrictions on Manager Shareholders MIPs will normally include provisions preventing man - agement shareholders from competing with the tar - get’s business. Any such non-compete clauses are generally limited, geographically and temporally, typically for about 12 months after the relevant manager’s exit from the business (although longer periods may be possible, depending on the nature of the transaction and the position held by the manager, as well as the size of the equity stake held by the manager). It is also com - mon for these clauses to extend to a prohibition on soliciting key employees, suppliers and customers of the target. These clauses are generally included in both the MIP documentation and the relevant man - ager’s employment agreement (in the latter case to the extent that a new contract is put in place contem - poraneously with the MIP documentation). 8.5 Minority Protection for Manager Shareholders Manager shareholders often do not have the benefit of anti-dilution protections. In certain scenarios, such as where the manager shareholders hold a significant majority stake or the management team roll over their existing vested interests in the target, the manager shareholders may be able to negotiate the addition of certain protections to the shareholders’ agreement, such as veto rights over specific matters that would materially prejudice their interests (eg, amendments to the company’s constituent documents). However, it would be very unusual for manager share - holders to have a meaningful influence over a private equity owner’s exit strategy/rights. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights For wholly owned portfolio companies, the private equity owner will have complete control over the company. For portfolio companies that would be wholly owned by the private equity owner but for a management
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