• 25Nov

    M&A Academy – “Dealing with underwater management equity arrangements”

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    On 19 November, we hosted the second session of our M&A Academy with a hot and present issue: How to keep the management of private equity backed companies motivated in and after the financial and economic downturn?
    Luc Legon, Director Personal Tax at PricewaterhouseCoopers, presented the different solutions available according to the various expectations of management.

    Download “Dealing with underwater management equity arrangements“.

    More info about the M&A Academy season (programme, subscriptions, etc.).

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  • 14Jan

    Proposed change in the French tax treatment of carried interest

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    The French Senate has adopted an amendment to the Draft Finance Act for 2009 (article 4bis of the DFA) for the purpose to address the tax treatment of carried interest shares granted to FCPR (Fonds Communs de Placement à Risque) and SCR (sociétés de capital à risque) managers.

    Subject to any possible amendments, the proposed new tax regime for carried interest shares would apply to FCPRs and SCRs set up as from January 1st, 2009, and to shares/rights issued as from this date.

    Current tax regime

    Under a tax guideline released by the French Tax Authorities on March 28th, 2002, distributions and gain arising from “carried interest” shares benefit of the capital gain tax treatment (i.e. current rate of 29%), provided the following conditions are simultaneously met:

    ·         the carried interest shares are acquired or subscribed by all or some of the fund managers as a capital investment;

    ·         within the same FCPR or SCR, there is only one category of carried interest shares;

    ·         the fund managers holding carried interest shares do not own other shares in  the FCPR or SCR which are eligible to an income tax exemption;

    ·         the fund managers holding carried interest shares are allotted a fair salary.

     

    New tax regime resulting from the amendment

    In the future, the application of the French capital gains tax treatment to carried interest shares would further require that: 

    ·         the carried interest shares are acquired at a value broadly pertaining to a market value, and;

    ·         all carried interest shares issued by a FCPR or a SCR should meet the following conditions: 

    1.  the carried interest shares must, in principle, represent at least 1% of the total subscriptions in the fund, and;
    2. carried interest payments take place at least five years after the creation of the fund or the issue of the shares and, for FCPRs, after repayment of the contributions made by the other investors.

    These conditions are obviously more restrictive but the good news is that the capital gain tax treatment would also apply to carried interest in funds located in the EU or in an EEA State with which France has signed a treaty for avoidance of double taxation including an anti-tax avoidance clause, provided the main purpose of the fund is to invest in companies neither listed in France nor abroad.

    If the carried interest share is not eligible for the capital gain tax treatment it will be subject to tax (at rates up to 40%) and social security tax as salary income.

     

     

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  • 18Dec

    Private Equity – Underwater equity – Resetting of Management Incentives

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    To meet their performance objectives, private equity firms must rely on talented, highly motivated managers within their portfolio companies.

    To date, aligning the financial interests of portfolio company managers with those of investors has proved to be the most motivational tool in driving them forward. But is this alignment still there in the current financial and economic downturn, which may have resulted in a drop in  enterprise value?

    One consequence of the current financial and economic crisis is that private equity houses may have to cope with “underwater” equity and should consider resetting management incentives so that they continue to deliver what they are intended to: retention, motivation, reward and alignment. The question is how this resetting can be appropriately structured from a tax and legal perspective.

    In this respect it may be helpful to think of a deal as a “cake” with the debt and equity forming various slices. Resetting the incentive may be done by waiving shareholder debt, reducing or turning off the coupon on shareholder debt, converting shareholder debt into equity, restructuring management’s holding to rank ahead of shareholder debt, amending equity, creating new ratchets, creating preferred shares, granting  share options and so on

    All the alternatives will potentially result in additional value flowing into the sweet equity held by the portfolio company managers and may potentially trigger a tax and social security tax cost for management in most jurisdictions. From a Belgian tax perspective, private equity houses might validly consider granting share options to structure this flow of value to sweet equity. The advantage of share options is threefold: a proven tax treatment, high flexibility in defining the share option features, a lump-sum taxable value that could prove to be far below the actual option value.

    Feel free to contact our Management Participation Team for any questions you might have in respect of resetting management incentives held by your portfolio company managers.

     

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