Incentives to Directors in the Divestment Process of a Family Business

In recent years, it has become more frequent for family businesses to grant incentives to their directors related to the increase of value in the company. This, with the objective of associating the directors with the family by connecting certain percentage of the remuneration with the creation of value in the company, without them becoming shareholders of the company. These incentives are usually granted for a specific corporate transaction or for a specific period. 

The corporate transactions that most trigger incentive payments for directors linked to the company`s value creation are usually the listing of the company`s shares on a stock market and the family`s divestment in the company. 

Divestment in a family business can be defined as the total or partial transfer of the family`s participation in the company. 

Some of the common incentives offered to directors during divestment process are the following: 

a. Compensation: As general rule, the determination of this incentive of the directors is usually calculated as a percentage of the transaction, as long as the minimum percentage previously established either in the work contract or in the agreements between the family and the directors is reached; however, there are situations in which, prior to the transaction, a fixed amount is determined with the possibility of being increased depending on the sales received. 

b. Participation in the Capital: In some cases, the directors may have the opportunity to acquire some participation in the capital. It is important to note that it can take different forms, and the way it is granted to directors will depend on the circumstances of the company and divestment process. 

c. Employment protection: Directors may be given employment guarantees for a certain period after the divestment. Typically, the post-divestment period is three to eighteen months. This means that they will have assurance that their jobs will not be affected during the transition period. This protection is important to ensure that the directors remain committed to the divestment process, which in turn helps to maintatin stability within the company. 

d. Growth opportunities: Directors may also receive growth opportunities within the new company structure after the divestment. These opportunities are not just limtied to getting promoted or leading new business ventures, they can also include training programs, the chance to work in different departments or different project. This growth opportunities are valuable because the help directors develop new skills, broaden their knowledge, expand their network, and stay motivated and engaged during the divestment process. 

It is advisable that incentives are linked to clear and measurable objectives, balance risk and reward, and be clearly communicated to directors and shareholders.

In conculsion, incentives for directors are an important factor to consider during the divestment processes of family businesses, as they can motivate directors to achieve the objectives of the divestment and maximize the value obtained. However, it is important to carefully design incentives for directors in order to avoid conflicts of interest that could negatively impact shareholders and the company. 

At Gentile Law, we have years working with family businesses and we are prepared to advise you on all kinds of questions you may have related to this topic, as well as to give you our legal opinion on the divestment process of family business.