CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
Undertakings may be “hard” (no out) or “soft” (out for superior offer) for major shareholders, although it is more difficult to obtain hard lock-ups in competitive processes. As private equity-backed privatisations tend to be “friendly”, directors and officers will also be asked to execute soft lock-ups. Under Canadian securities laws, shares tendered to the bid can be used by the buyer to vote in favour of the second- stage squeeze-out. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentive plans are commonly used in Cana - dian private equity investments. Stock option plans are most frequently implemented (with straight time vesting provisions and/or performance vesting crite - ria). The option pool is typically anywhere between 5% and 20% of the outstanding common equity. Stock options have historically been used by private equity firms in Canada as an effective means of incen - tivising management teams. The tax benefit of stock options for members of management may be limited if the corporation issuing the options is not a CCPC. 8.2 Management Participation Most private equity investors in Canada focus on strong management teams when identifying attrac - tive targets. Where a management group is included in the selling parties, rollover arrangements for a minority position are considered, and such members execute a shareholders’ agreement with the private equity and any other institutional investors. Sweet equity is not common for companies of the size and stage a Cana - dian private equity fund is typically targeting. Investments may be in the same category of shares as the institutional investor, or distinct, and may be vot - ing or non-voting. Notwithstanding scenarios where existing management continues to hold a significant stake in the company, private equity investors will typically impose or structure the management invest - ment so as to facilitate decision-making and approv - als required to proceed with the private equity fund’s expansion strategy without management consent or blocking such decisions. These mechanics may
include non-voting shares, shareholders’ agreement undertakings, or the appointment of agents or proxies
for such management shareholders. 8.3 Vesting/Leaver Provisions
Leaver provisions are negotiated, and different private equity funds take different approaches to manage - ment equity in cases of termination and departure. Leaver provisions are almost universally found in stock option plans, but are more nuanced and negotiated in the case of shareholders’ agreements. Generally speaking, unvested stock options will ter - minate concurrently with the last date of employment, whereas vested stock options will remain exercisable for a period of time following the last date of employ - ment (unless the employee has been terminated for cause). In such circumstances, management employ - ees may become shareholders subject to the share - holders’ agreement in place, but the company may also have the right to “call” such shares in the case of the employee leaving the company, using a prede - termined pricing arrangement equal to the fair market value, or some discount thereon depending on the circumstances of departure. Similarly, although less consistently, the sharehold - ers’ agreement may provide the company with the right to “call” any shares held by management in the case of termination or departure using predetermined pricing arrangements (again, varying depending on the circumstances of departure). In some cases, particularly where management continues to hold a significant stake in the company, management share - holders may negotiate the right to “put” their shares, forcing the company (or other shareholders) to redeem or purchase the holder’s shares in certain cases of departure, using predetermined pricing arrangements. In the absence of specific leaver provisions, manage - ment shareholders are bound by obligations of (and benefit from rights accorded to) other shareholders, regardless of their status as an employee. Vesting provisions vary from one stock option plan to another, with time vesting over a period of up to five years being the most common. However, performance vesting criteria (based on EBITDA, for example) are
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