The situation
Nothing was in place. The amount to be paid to each had been settled at one million euros, but the vehicle remained to be chosen.
The prospective buyer wanted to keep those five people after the transaction, which called for a mechanism that was clear and enforceable, not a verbal promise.
Our support
- 01
Setting out the three possible routes
We identified three vehicles to deliver the same value:
- a cash bonus paid on exit;
- a free share award meeting the conditions of the French regime;
- a co-investment in preference shares.
In the third route, each executive subscribes €220,000 of preference shares, funded by a loan on market terms where they cannot commit their own cash. Those shares carry no financial rights of their own: no dividend, and nothing beyond what the promises provide. The whole economics of the mechanism lies in a put and a call.
Point of attention. A co-investment is only distinguishable from remuneration if the risk of loss is real. A subscription funded without risk, or backed by a guarantee of recovery, will be recharacterised. - 02
Calibrating against the article 163 bis H cap
The gain falls within the capital gains regime only within the limits set by article 163 bis H of the tax code. Above them, the excess is treated as salary, with the corresponding employee contribution.
Three conditions shape the mechanism:
- a real risk of loss on the €220,000 subscribed;
- a holding period of at least two years;
- a gain contained within a multiple of the company’s financial performance.
The promises were drafted with that cap in mind. As the company’s value was expected to double between subscription and exit, the cap stood precisely at the amount targeted, so that the whole of the gain remained within the capital gains regime.
Point of attention. The cap is calculated, not observed. It is the drafting of the promises that contains it, and that drafting must be settled at subscription. - 03
Costing the net of the three routes
We modelled, for each route, the net that reaches the beneficiary.
In this case: on €1,000,000 received on exit by each executive, the net came to €441,400 through salary, €561,010 through qualified free shares, and €646,000 through co-investment. A gap of €204,600 between the first and the last, for an identical value delivered.Depending on the route, the costing took account of employee contributions, social levies on investment income, income tax and the exceptional contribution on high incomes.
We also measured what each route costs the company, employer contributions and the specific contribution included, net of the corporation tax saving attached to those charges. For each euro the company commits, the share that actually reaches the beneficiary varies twofold depending on the route chosen.
Point of attention. The amounts shown are given for illustration, on one set of assumptions and on the law in force at the date of the engagement.
The result
The five executives subscribed preference shares, with cross promises calibrated against the statutory cap.
The documentation was settled before subscription: articles of association, terms of the preference shares, put and call options, and what happens to the shares on a departure before the sale.
The decision was taken on figures rather than on instinct. That is the point of this step: the amount is negotiated, but the vehicle is calculated.
This reasoning does not apply only ahead of a sale. It arises in the same way each time a company wants to associate a key person with the value they help create.
This case was handled by the firm, in light of the law and case law in force at the time of the engagement, and in the light of circumstances specific to it. It is presented for illustration purposes only: it does not constitute advice and does not predetermine the treatment that might be adopted in another matter.