SPAIN Law and Practice Contributed by: Ignacio Sanjurjo, Ignacio Echenagusia, Alejandro Espín and Román Cantín, Deloitte Abogados y Asesores Tributarios, S.L.U.
8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of the management team (who often retain equity of between 5% and 10%) is a standard feature of PE transactions, aimed at aligning the management and investor’s interest by encourag - ing the former to enhance the value of the target com - pany and its affiliates. This is achieved by providing an extraordinary incentive to the target’s managers (independent and additional to their employment or mercantile relationship) in exchange for maximising the value of the company in a liquidity/exit event. The management team’s incentivisation is normally structured through MIPs, which typically include the following incentives: • ratchets linked to the PE fund’s ROI or IRR, and normally conditioned to the management team’s continuation; • phantom shares, stock options or similar plans; and • debt instruments, the interest on which is linked to the ROI or the IRR of the PE fund. The rights and obligations of the management team are typically set out in a combination of an SHA, man - agement incentive agreements (comprising a MIP’s general terms and conditions together with individual adherence letters from each manager) and/or execu - tive director agreements. 8.2 Management Participation PE investors usually hold preferred shares to secure control over the company’s decision-making – either holding the majority of voting rights and/or veto rights over key or strategic matters. They may also benefit from contractual rights such as a call option right over the remaining shares, drag-along rights, a liquidation preference and similar protective mechanisms. In cases where the managers are not former share - holders, it is also common for PE funds to provide financing for the acquisition of their equity. Management equity plans involving investment in the PE fund’s structure have become one of the major
Break-Up Fees In scenarios involving competing takeover bids, the listed company and the initial bidder may agree on a break-up fee to compensate the initial bidder for the costs and expenses incurred in preparing its bid, subject to the following limitations: • it cannot exceed 1% of the total amount of the bid; • it must be approved by the board of the listed company; • its arrangement must be supported by a favourable financial advisors’ report; and • its details must be disclosed in the bid prospectus. 7.6 Acquiring Less Than 100% Any bidder who, as a result of a takeover bid, has acquired at least a 90% stake of the share capital – along with the related voting rights – and whose offer has been accepted by shareholders holding at least a 90% stake in the listed company is entitled to require the remaining shareholders to sell their shares at a fair price. The bid prospectus must indicate the offeror’s inten - tion to execute the squeeze-out right in the event of acquiring a 90% stake, which has to be executed within three months after the expiration of the accept - ance period of the takeover bid. Remaining shareholders also have a sell-out right, which must be executed under similar terms and con - To ensure the success of a takeover bid, it is stand - ard market practice to reach irrevocable commitments between the bidder and significant shareholders prior to the issuance of the offer – often including not only an irrevocable right to sell, but also a commitment to exercise their voting rights to facilitate and sup - port the successful completion of the bid at both the shareholder and board level. ditions to the squeeze-out right. 7.7 Irrevocable Commitments
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