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Executive Compensation and Employment Considerations in Cross-Border Private Equity Deals

Executive Compensation and Employment Considerations in Cross-Border Private Equity Deals
May 16, 2022

There are many Canadian-specific executive compensation and employment issues that arise in the context of cross-border private equity transactions. Several of these issues relate to the treatment of management’s existing and go-forward incentives.

Here are the top five things you need to know:

  1. Transaction Documents. Canadian-specific nuances applicable to employment relationships and management incentive plans should be addressed in transaction documents involving Canadian employees, particularly when a commercial deal includes any rollover or reinvestment.

  2. Equity-Based Incentive Plans. Stock options are the most tax-efficient long-term incentive arrangement for Canadian employees. With modest revisions, U.S.-style stock option plans typically work well for Canadian employees. If a corporation is not in the fund’s structure, U.S.-style “profits interests” may be used. However, due to differences in the valuation methods accepted in Canada, the grant of profits interests will be a taxable benefit to the employee unless purchased for fair market value.

  3. Cash-Based Incentive Plans. If a cash-based long-term incentive award is a salary deferral arrangement (SDA) for Canadian tax purposes, an employee may be required to pay tax on the award before receiving the payment. The most straightforward way for an award to be excluded from the definition of an SDA is for the award to payout before December 31 of the third year following the year to which the grant relates.

  4. Termination Entitlements. Long-term incentive-plan documents for Canadian employees should clearly define when employment ends for the purposes of the plan and also waive damages for the loss of any entitlement during a common-law notice period where the intention is for employees to forego vesting after they cease to provide services.

  5. Restrictive Covenants. Non-competition provisions are often difficult to enforce in Canada, and Canadian courts will not “blue pencil” provisions. Further, as of October 25, 2021, non-compete provisions are prohibited in employment contracts and other employment-related agreements for employees, other than certain executives, in Ontario.

Have more than five minutes? Contact Holly Reid, Sean Maxwell, Lindsay McLeod, Laura Blumenfeld or any member of our Pensions, Benefits & Executive Compensation or Employment & Labour groups to learn more.