Securing your management package ahead of a sale

The situation

Our support

1. 01

   Understanding the rights attached to each instrument

   We analysed each class of securities separately in order to identify:

   • the price paid by the executive;
   • the financial rights attached to the securities;
   • the existence of a genuine risk of capital loss;
   • the presence or performance conditions;
   • the good-leaver and bad-leaver clauses;
   • the restrictions on transfer;
   • the split of value between the different classes of shareholders.

   This instrument-by-instrument analysis was essential. In the matter studied, the ordinary shares exposed to a sweet-equity mechanism did not have the same risk profile as the shares carrying a priority return.

   Point of attention. Two classes of shares subscribed at the same time may receive different tax treatment if their financial rights, level of risk or transfer conditions are not identical.
2. 02

   Determining the tax characterisation of the gain

   We then analysed the package in light of the management-package regime provided by article 163 bis H of the CGI.

   That provision states that the gain acquired in consideration for employee or director duties falls, in principle, within the salaries-and-wages regime. Under certain conditions and within a certain limit, a portion of the gain may nevertheless fall within the regime for capital gains on the disposal of securities.

   Our analysis covered, in particular:

   • the link between the grant of the securities and the duties performed;
   • the risk of loss borne on the investment;
   • the holding period of the securities;
   • the contractual conditions imposed on the executive;
   • the financial performance achieved by the group;
   • the portion of the gain that could fall within the capital-gains regime;
   • the portion likely to be taxed as salary.

   Simplified example: for securities subscribed for €100,000 and then sold for €1 million, the €900,000 gain is not automatically taxed in full as a capital gain. Its characterisation depends, in particular, on article 163 bis H of the CGI, on the features of the package and on the financial performance achieved.
3. 03

   Modelling the net after-tax gain

   We prepared several simulations to measure the impact of the various possible tax characterisations.

   The scenarios distinguished, in particular:

   • the portion of the gain within the capital-gains regime;
   • the portion possibly taxed as salary;
   • the social levies and specific contributions that may apply;
   • the possible impact of the exceptional contribution on high incomes;
   • the date on which the tax would become due;
   • the consequences of a sale, a share-for-share exchange or a contribution.

   The firm’s in-house tools already allow different instruments to be compared, in particular cash bonuses, free shares, BSPCE, preference shares, BSAs and co-investment mechanisms.

   Point of attention. The same exit value can lead to very different net amounts depending on the nature of the instruments and the tax characterisation of the gain.
4. 04

   Securing the valuation and the documentation

   We checked that the acquisition or subscription price of the instruments could be justified and that the value used at the various stages of the package was sufficiently documented.

   Our work covered, in particular:

   • review of the available valuation reports;
   • analysis of recent transactions in comparable securities;
   • account taken of the specific rights attached to the preference shares;
   • documentation of the value of the securities at acquisition or on exercise of the warrants;
   • consistency between the valuations, the legal documentation and the reporting data.

   In a matter concerning the exercise of BSPCE, the firm recommended documenting the value of the shares at the exercise date from objective evidence and checking that no significant event called the reference used into question.

   Simplified example: where a warrant allows a share to be subscribed for €1 when it is worth €8 on the day of exercise, the €7 gap per share must be identified and documented. For 10,000 shares, this represents a €70,000 benefit, before applying the tax rules specific to the instrument.

   For BSPCE, article 163 bis G of the CGI distinguishes the benefit corresponding to the difference between the value of the security on the day of exercise and its price set at grant.

5. 05

   Anticipating the liquidity event

   Finally, we analysed the consequences of the contemplated transaction on the package:

   • a sale against a price paid entirely in cash;
   • payment combining cash and the buyer’s shares;
   • retention of part of the securities after the transaction;
   • a rollover mechanism;
   • shares received subject to a vesting period or a presence condition;
   • application of the leaver clauses;
   • reporting obligations linked to the realisation of the gain.

   Particular care was needed where the shares received in consideration were subject to conditions linked to continued duties. In a transactional matter examined by the firm, the analysis focused precisely on the risk that shares subject to a presence condition would be treated as employment income rather than as part of the sale price.

   Point of attention. The tax treatment depends not only on the amount received, but also on the conditions attached to the payment: presence, performance, unavailability or loss of the securities on departure.