Many businesses offer key managers the opportunity to participate in the increase in value of the business through a management incentive plan (options, SARs, certificates).
When the company is sold, key managers thereby receive a portion of the sale proceeds.
Conflict of interest when key management reinvests
If a key manager economically holds 2% in the company before a sale through the MIP and will start holding 4% after the sale, a purchase price reduction from €6,000,000 to €5,000,000 means €20,000 loss for the manager as a seller, but €40,000 gain as a buyer.
This creates a conflict of interest, because in that case, the key manager has an interest in a lower sales price, which conflicts with the interests of the selling shareholder.
Knowledge and guarantees
Further, key managers often have more knowledge of day-to-day operations than a selling shareholder who is less directly involved in day-to-day operations.
When key management does not sufficiently share its knowledge with the buyer, it can lead to warranty breaches. In the case of compensation roads a warranty breach of €100,000, the key manager as seller pays only €2,000 (2%), but benefits from the compensation as buyer for €4,000 (4%). Again, a conflict of interest exists between the key manager reinvesting and the selling shareholder.
Sellers are wise to protect themselves from these conflicting interests in the sales process.
