by Thomas Hachette and Etienne Langer In the context of public offerings of the shares of listed companies, economic and…
In a bid to align the economic interests of management with their own, investors in companies or investment funds either award or sell their senior executives financial instruments. These schemes will in turn ensure that management compensation reflects the added value generated or the growth in enterprise value achieved. While the design and structure of a management incentive scheme determines the degree to which management and investor interests are aligned, its valuation is required in appraising senior executives’ financial commitment – estimated when the financial instruments are disposed of – and the basis on which they will be taxed.
The Fiscal Administration may challenge the subscription price of the securities included in the management package. And, to that end, may apply valuation methods to ascertain the price of these securities.
Furthermore, and in the context of a manager’s departure, a material difference in the estimated value of those securities may give rise to litigation.
In order to value stock options, we generally consider any of the following three methods: the Black & Scholes formula, the binomial/trinomial tree model, and Monte-Carlo simulations.
In most cases, the covenants set in management packages require using a more complex valuation method than the simple application of the Black & Scholes formula. Moreover, the major difficulties lie in setting the adequate valuation parameters (appropriate expected volatility levels, maturity, etc.) and valuing specific covenants in the management package (vesting clause, Good/Medium/Bad leaver clause, analysis of lack of marketability, etc.).
Our scope of intervention includes:
- Present the management package (risk/gain profile, clause analysis, etc.)
- Analyze the studies presented by the opposing party (Fiscal Administration or manager) and assist the client and their legal counsel in preparing comments and responses to opposing arguments
- Accompany the client over the course of the discussions with the opposing party/Fiscal Administration or before a legal expert
- Write an expert report opposing the Fiscal Administration, and that can be produced before a tribunal