ROMANIA Law and Practice Contributed by: Ileana Glodeanu, Andreea Cărare, George Ghitu and Delia Dumitrescu, Wolf Theiss
companies). Management shares are often subject to vesting schedules, typically over a period of up to five years, though in some cases the vesting may extend even longer depending on the business plan or invest - ment horizon. Non-equity incentive schemes are less common but are seen in smaller deals or in programmes with many participants in which the equity structure is too bur - densome. These schemes may take various forms, ranging from performance-based cash bonuses to cash-settled phantom equity or option plans. Long-term incentive plans (“stock option plans”), based on which the investor grants equity in the company to the relevant management under certain conditions, are among the most preferred instruments in Romania. These plans are particularly attractive due to the favourable tax treatment applicable under Romanian law, given that taxation arises only when the shares are sold and a capital gain is realised rather than at the time the options or underlying benefit are granted; this is unlike other types of benefits, which Good/bad leaver provisions are common provisions in the shareholders’ agreement or the articles of associa - tion of the target company. A standard “good-leaver” clause would include the following circumstances: are typically taxed upon receipt. 8.3 Vesting/Leaver Provisions • termination of the employment of the manager other than for a material breach of his/her man - date/employment agreement; • resignation by the manager for specific reasons, such as a material reduction in their compensation or responsibilities; • a material breach by the company of the terms of the management agreement; • death or incapacity; • retirement of the owner-manager at an agreed age; or • if the manager is otherwise determined by the pri - vate equity fund to be a “good leaver”.
The standard definition of a “bad leaver” would apply in circumstances such as: • termination of his/her position within the manage - ment structure for a material breach of his/her agreement; • resignation of the manager shareholder for rea - sons other than those specifically agreed with the private equity fund; and • the manager shareholder breaching specific restrictive covenants included in the shareholders’ agreement. The leaver provisions for the management share - holders will vary depending on how the transaction is negotiated and structured. Good-leaver provisions usually allow the management members concerned to retain their favourable pric - ing (and even vesting) terms. Bad-leaver provisions represent a substantial deterioration relative to the favourable good-leaver terms. Regarding the vesting provisions, it is becoming more common in the market for private equity funds to reward top managers with performance stock options, rather than time-vested ones. This means managers are rewarded only if they reach certain indicators, such as specified revenue growth. Furthermore, it is a market standard to impose certain restrictions in the articles of association of the target companies in relation to the disposal of equity by the management shareholder (eg, obtaining board approval from the shareholders before selling their shares). 8.4 Restrictions on Manager Shareholders Post-termination restrictive covenants are fairly com - mon in Romanian transactions for top managers and other key personnel. The most frequently used cov - enants include non-compete, confidentiality, non-dis - paragement and non-solicitation clauses. Romanian law provides a limit on enforceability only for non-compete clauses mentioned in the employ - ment agreement of management shareholders, with such clauses being valid only for a period of up to two years following the termination of an employment agreement. If the non-compete clause is provided in
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