SPAIN Law and Practice Contributed by: Ignacio Sanjurjo, Ignacio Echenagusia, Alejandro Espín and Román Cantín, Deloitte Abogados y Asesores Tributarios, S.L.U.
incentive mechanisms in the PE environment. Typical - ly, the manager invests indirectly at the same level as the PE fund through fully participating entities locat - ed in foreign jurisdictions. In most cases, the entire management team invests through the same vehicle (ManCo), managed by the PE fund and holding the so- called sweet equity (share capital acquired by manag - ers or key employees under favourable conditions). 8.3 Vesting/Leaver Provisions Vesting mechanisms, which are very common in MIPs in Spain, are used to mitigate the risk associated with the non-continuation of the key managers. Vesting periods are typically between four and five years. MIPs frequently include accelerated vesting provi - sions under which – if a liquidity event takes place prior to vesting of 100% of the incentive, and provided that the beneficiary complies with all the terms and conditions set forth in the MIP – the beneficiary would be entitled to receive 100% of the incentive amount at the time of the liquidity event, regardless of the remaining vesting period. MIPs also include “good-leaver” and “bad-leaver” provisions, to establish the exit scenarios of the man - ager that would or would not be permitted. • Good-leaver provisions entitle the beneficiary to receive the total amount of the incentive linked to the liquidity event – or prior to the liquidity event if certain “reasonable” circumstances agreed between the PE and the manager occur, including death, severe/permanent disability, dismissal by the company without cause or resignation by the manager for good cause. • Bad-leaver provisions entitle the PE to terminate the management incentive agreement early, with - out paying the incentive to the relevant beneficiary; these are the opposite of the good-leaver scenari - os referred to in the foregoing. 8.4 Restrictions on Manager Shareholders Restrictive covenants and related obligations are typi - cally set out in the documentation regulating the rela - tionship between the PE and the beneficiary. PE funds usually require the beneficiaries to:
• assume non-compete, non-solicitation and exclu - sivity obligations; • remain with the company during an established period after the PE fund’s exit if a new investor offers similar conditions; and • in certain transactions, grant R&W at the time of the PE fund’s exit. Non-disparagement clauses (regulating what a man - ager can or cannot say about the PE fund after its exit) are not usual in Spain but may be agreed upon. Restrictive covenants, such as non-compete, non- solicitation and exclusivity, are typically included in both equity and bonus/contractual plans, and a breach usually has a negative effect on managers’ perceptions of the incentive. It is essential to ensure these obligations are properly assessed under labour law and that appropriate remu - neration is provided in exchange. 8.5 Minority Protection for Manager Shareholders Manager shareholders are usually granted protection rights in relation to a PE fund’s exit/divestment and anti-dilution of their participation, such as tag-along rights, allowing them to sell their shares alongside a PE investor upon exit and also conditioning the exer - cise of the usual PE fund’s drag-along rights to a mini - mum valuation of the manager’s shares. It is standard market practice to ensure that manager shareholders can preserve their percentage of sweet equity in the company during the PE fund’s period of investment. This may include providing financing to managers for the subscription of additional shares. Anti-dilution provisions typically include a commit - ment from the PE fund to prioritise non-dilutive financ - ing sources where feasible. However, the PE fund is typically entitled to meet urgent treasury needs. Veto rights are generally reserved for PE investors, either through preferred shares conferring direct veto rights over certain decisions or by keeping control over the majority of the voting rights of the company (in some structures, sweet equity does not have direct voting rights). However, certain key shareholder man -
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