Key points
- In an LBO, the fund acquires the target with debt and invites the managers to co-invest in the holding company on preferential terms.
- The management package aligns the managers’ interests with those of the fund: they stand to gain if the targets are met and to lose if they are not.
- The mechanisms include sweet equity (a different entry price that creates a leverage effect) and the ratchet (the managers’ stake increases according to performance on exit).
- Share warrants (BSA) and free share awards (AGA) give access to additional shares subject to performance and continued-service conditions, with a specific tax treatment.
- Under Article 163 bis H of the French General Tax Code (CGI), the gain received in return for the managers’ duties falls under the capital gains regime within a performance-related limit, provided there is a risk of loss (and a two-year holding period for shares bought or subscribed); any excess is taxed as salary. The terms (amount, ratchet, bad leaver, liquidity) are negotiated with the fund.
In a leveraged buyout (LBO), the investment fund acquires the target company and finances a significant part of the purchase price with debt. The incumbent managers are invited to co-invest in the new holding structure alongside the fund, on preferential terms. If performance meets expectations, these terms allow them to make a substantial gain when the company is sold. This arrangement is called a management package.
The logic is simple: align the managers’ interests with those of the fund by making the managers co-shareholders who have something to gain if the targets are met, and something to lose if they are not.
How the package works: the main mechanisms
The management package can take several forms, depending on the structure of the transaction and each party’s objectives.
Sweet equity. The managers invest in the share capital of the acquisition holding company at a valuation different from the one paid by the fund. This difference in entry price creates additional leverage for the managers: if the company grows in value, their gain is proportionally larger than the fund’s, for a smaller initial investment. However, an entry price below the real value of the shares may constitute a benefit taxable as salary from the time of subscription (Conseil d’État, 13 July 2021, No. 428506).
The ratchet. The ratchet is a mechanism by which the managers’ percentage shareholding increases if certain performance targets are met on exit (the fund’s IRR or investment multiple). Below the minimum threshold, the managers receive no ratchet. Above it, their stake increases according to an agreed formula. This mechanism creates a direct incentive to maximise performance.
Share warrants (BSA) and free share awards (AGA). Share warrants (bons de souscription d’actions, BSA) and free share awards (attributions gratuites d’actions, AGA) can be used within the management package to give the managers access to additional shares, subject to performance and continued-service conditions. Each of these instruments has its own specific tax treatment.
The investment structure
The managers generally invest in the acquisition holding company, not directly in the operating company. The holding structure may have several levels: a main acquisition holding company (owned by the fund and the managers) and sometimes an intermediate holding company dedicated to the managers. This structure affects the taxation of dividends received during the holding period and the tax treatment of the gain on exit.
Capital at risk and the tax treatment of the gain
A management package requires the managers to take a real capital risk. Under Article 163 bis H of the French General Tax Code (Code général des impôts) (in French), which applies to disposals made since 15 February 2025, the gain on shares acquired in return for duties as an employee or corporate officer is in principle taxed as salary. It falls under the capital gains regime up to a multiple equal to three times the change in the real value of the company, provided that the shares carry a risk of loss and, except for free shares, options and BSPCE (French start-up share warrants), have been held for at least two years. The excess portion remains taxed as salary. Artificially favourable investment terms (a nominal entry price, a guaranteed return of capital, no risk of loss) therefore expose the gain to taxation as earned income.
Negotiating the package with the fund
The terms of the management package are negotiated with the fund when the transaction is structured. The key points are the amount invested by the managers, the entry price and the valuation used, the ratchet thresholds and terms, the forced exit conditions if a manager leaves (bad leaver), the managers’ governance rights in the holding company and the liquidity terms.
For assistance in structuring and negotiating your package, see our dedicated pages: management package lawyer and employee and manager incentives lawyer.
