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“ESOP Fables” #3 – ESOP implemented in a regional business leader

“ESOP Fables” #3 – ESOP implemented in a regional business leader

I was very much looking forward to this “ESOP’s fable”. I am lucky that most of my clients are great and inspiring. However this client is one of the most popular. And you will soon find out why.

It all begins with the client’s decision

Given that this is a specific client, let's give it a first name, albeit a made-up one. Jointly with his wife, Václav has built a group from scratch with a turnover of over 2 bln, employed 1,000 staff, done a lot of good via a foundation and become a business leader and a major icon in his region. 

After graduating from school, Václav went abroad, where he earned enough money through manual labour within 2 years to start his own business in Czechia. At the beginning, he himself was unsure what field to pursue. In the end, he chose his field rather by chance. And yet he was able to get to the top in the Czech Republic. For this reason, I do not mention the particular field, because there is a good chance that some of you might recognise him.

A group of six managers joined Václav right from the start or very soon afterwards. He infected them with his diligence and high aims. He always respected them, and they always respected him. Václav's request to involve these managers in the employee stock ownership plan did not take long and Václav and I spent several working lunches having initial discussions on the issue.

Client and his requirements

The particularity of this stock ownership plan is that it was not primarily aimed at motivating the managers (as all key employees are already have high motivation from Václav and his wife), but as a kind of reward for their current and future cooperation. Yet, of course, the incentive element was also one of the requirements for the new employee stock ownership plan.

At the same time, Václav wanted only managers to be partners of the management programme, not their spouses. This aspect is often disregarded. When a couple enters into marriage, community of property is created (unless the spouses change this property regime by a notarial deed). This in fact means that the spouses acquire everything jointly and any change requires the consent of both spouses. 

Václav and I agreed that we would make the request for the managers' input conditional on their limiting the matrimonial property so as not to cover the shares under the employee stock ownership plan to ensure that the managers would always be the other party for Václav. At HAVEL & PARTNERS, we have a strong group of colleagues specialising in family law. Therefore, we were able to assist very quickly and efficiently in this area as well.

The story continues with the solution

Our discussions with Václav resulted in a conclusion that we would implement a management incentive program in the form of real shares, however, not directly in the main company, but at a management company. 

The management company (a shelf company established to implement the employee stock ownership plan) purchased a specific percentage of the entire group (even determining the appropriate percentage of the whole group needs careful consideration with regard to security for the founders as well as the tax implications of subsequent cash flows), while the management company was held by the holding company of Václav and also by the managers themselves. In addition, we retained the voting rights of the managers (in order to allow them to manage the group jointly to some extent - thus increasing their motivation) and set a flexible (again incentive) ratio regarding the distribution of shares in profit. 

Given that the managers had the opportunity to vote on the affairs of the management company at the general meeting, it was also advisable to enter into a shareholders’ agreement (SHA). The SHA laid down the basic principles of voting and management of the management company.

The completion of the employee stock ownership plan was then celebrated in big style with a lunch party (great food and drinks!). When the new shares were handed over to the individual managers, there was also champagne and group photos of this important milestone. 

Václav and his team continue to do well. I believe it is also thanks to our employee stock ownership plan. 

And I wish Václav and all his colleagues many more successful years ahead.

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ESOP Fables #6 - ESOP in a major investment group

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