Management packages: structuring under pressure

By Fabienne Kerebel, counsel.

Management packages : a structure under pressure

The management packages have long been the basis of the strength and weakness of private equity operations. On the one hand, access to capital for managers (corporate officer and/or employee of the group) contributes to the alignment of interests inherent in the success of these operations. On the other hand, the link – more or less strong – resulting between the exercise of the corporate office and/or the employment contract and the holding of securities raises the question of the common thread of the tax qualification of the gains resulting from the mechanisms of management packages, between capital gains on sale or salaries and wages (with a parallel issue of liability to social charges). The balance therefore oscillates according to the level of the risk of reclassification of these gains in salaries and wages. whose cursor varies according to the analysis grid accepted or developed by the tax administration and case law.

After a few years of relative calm, a storm shakes again the universe of management packages. By a succession of stops, the Council of State (in tax matters), in the wake of the Court of Cassation (in social matters), has profoundly modified the approach hitherto followed and accepted for taxation criteria gains from the tools of management packages, refocusing its analysis grid around the link with the functions of the person concerned. The criterion, hitherto central, of capital risk-taking is to facto rendered, if not ineffective, at the very least incidental. The upheaval is major in an environment stabilized around a capitalistic logic, considering the financial risk of investment and, in counterpoint, the valuation of the instruments of management packages as the main measure of protection of the beneficiary managers against the risk of requalification of the gains in salaries and wages. In other words, the shift recently initiated by case law potentially calls into question the protective nature of the structuring of management packages, as designed and refined by market practice.

This reversal is as unexpected as it is clumsy and open to criticism. The chosen approach obviously ignores the economic reality: the link between employment contracts or mandates and the shareholder package is indissoluble due, on the one hand, to the incentive dimension of the management package and, on the other hand, to a requirement for consistency and shareholder discipline. The principles identified by the Conseil d'État are also flawed by the nebulosity of their outlines and excessive generality. In all cases, this alliance between an anachronistic philosophy and confusing rules introduces strong legal uncertainty, weakening past, current and future private equity operations and, correlatively, the attractiveness of investments in France.

Fabienne Kerebel delivers in this article her analysis of the new environment of management packages, around 2 main points:

• the new jurisprudential context, between vagueness and tension
• what a revival for the tools of management packages ?