Transitioning into an employee ownership trust (EOT) is a significant milestone in a business’s life cycle. EOTs enable the owners to exit their business, and can be a key step in the implementation of a succession strategy for the management of the company, allowing the former owners to step away from their executive responsibilities.
To maximise the benefits of an EOT succession, it is essential that all stakeholders including the former owners, the board of the employee-owned company, the trustee directors of the trustee company and the employees understand their roles and responsibilities post-transition, and that the business takes legal advice to ensure these obligations are clearly set out in the constitutional documents.
Effective engagement with employees both operationally and financially will also be essential to a successful transition into employee ownership (EO).
Contents:
- Getting the correct legal advice
- What role does a selling shareholder have?
- What are the responsibilities of the EOT trustee shareholder?
- What should the trustee shareholder do post-transition?
- How will the EO Company Board operate post-transition?
- Why you should seek expert legal advice for selling your business to an EOT
Getting the correct legal advice
There is no one size fits all ‘blueprint’ for an EOT transition. Some companies will obtain legal advice on post-transition considerations as part of preparing for the transaction, whilst others take advice post-transaction. Legal advice will help the different stakeholders to properly carry out their duties following the transaction.
What role does a selling shareholder have?
Selling shareholders will need to come to terms with no longer having sole responsibility for decision-making for the EO company. They can continue as directors on the company board although the transition to EO can provide a path to upskill successor company directors as the sellers gradually let go of these responsibilities.
Sometimes the selling shareholders will also become trustee director/s and will need to know how to legally navigate conflicts of interest which legal advisers can help with.
Selling shareholders must also make sure they have suitable protection in relation to any action which may affect the EO company’s ability to fund the balance of the sale payment due to them post-completion. They should have veto rights on several matters including in relation to any material expenditure other than expenditure in the ordinary course of business, or any payments of distributable profits from the EO company to continuing minority shareholders.
What are the responsibilities of the EOT trustee shareholder?
The trustee of the EOT has a number of responsibilities in the post-transaction structure. As trustee of the EOT, it has an overriding obligation to safeguard the shares held in the EOT for the benefit of the employee beneficiaries. As sole or principal shareholder of the EO company, it has a responsibility to exercise high level oversight over the EO company and following completion will have an obligation to pay the balance of any sale consideration due to the selling shareholders.
It is common to appoint a trustee company to act as trustee of the EOT and therefore the directors of the trustee company will be responsible for discharging the responsibilities of the trustee. This adds another layer of governance as the trustee directors will have directors’ duties to the trustee company, like any company director, as well as the responsibility to discharge the duties of the trustee company under the EOT trust deed.
What should the trustee shareholder do post-transition?
To carry out their duties effectively, the trustee directors will require regular financial and other material information from the EO company Board in relation to the EO company. Also, the trustee directors should meet regularly to authorise payments of deferred consideration by the EOT trustee to the selling shareholders.
The trustee directors may also require training to fully understand the scope and responsibilities of their role.
Legal advisers can support the trustee directors to implement the processes to carry out their duties effectively post-transaction.
How will the EO Company Board operate post-transition?
The EO company board continues to have operational day to day responsibility for the running of the EO company. Its directors will need to obtain consent for certain actions, both from the trustee and the selling shareholders, whilst they continue to be creditors in relation to their sale payment.
Preserving EOT tax relief
The selling shareholders, trustee and the EO company board will all need to respect their duties and responsibilities post-transaction to ensure the EOT tax relief criteria are not inadvertently breached, which could cause the selling shareholders’ to lose EOT tax relief or could otherwise create a CGT charge in the EOT which would reduce the value of the trust assets or would need to be funded by the EO company.
Communicating and engaging employees with the EOT
To obtain the benefits of employee ownership post-transition, it is crucial to engage employees.
Recent research has shown employee-owned businesses are 8-12% more productive than non-employee-owned businesses. They are also more likely to be increasing their headcount and are over 25% more likely to have seen profits increase in the last five years than non-employee-owned businesses.
Whilst the timing, type and nature of engagement will be EO company and culture specific, legal advisers can help the business implement structures to facilitate employee engagement.
Many employee-owned businesses provide employees with the opportunity to become a trustee director of the trustee company. Legal advisers can support the employee trustee director appointment process, advising on the mechanics such as election processes.
Sometimes these businesses will set up a separate employee council or employee board. Legal advisers can provide support with the terms of reference of the employee council or employee board, assisting the business to determine its role and responsibilities as well as eligibility for membership and administrative matters such as the frequency of its meetings and how it interfaces with the EO company board and the trustee directors of the trustee company.
Implementing financial reward for employees post-transition
Introducing new reward schemes for employees post-transition can be very effective to demonstrate the difference of being an employee-owned business. There is a tax-advantaged bonus scheme which EO companies can operate for their employees, under which employees can receive a bonus of up to £3,600 per tax year free of income tax (but not NIC).
Subject to paying the balance of the deferred consideration to the selling shareholders, the trustee of the EOT will be responsible for distributing benefits to employees from the EOT which can provide significant financial incentives and rewards to employees.
Sometimes businesses will also wish to implement leadership incentives in parallel with the benefits provided to employees through the EO bonus scheme and the EOT.
Legal advisers can advise EO businesses on the design and implementation of the EO bonus scheme, support businesses with robust and compliant processes to distribute benefits from the EOT and design and implement separate leadership incentives to enable the provision of meaningful financial rewards to employees post-transition.
Why you should seek expert legal advice for selling your business to an EOT
Legal advisors will ensure that all the relevant steps are carried out to ensure you gain the valuable tax advantages available while preserving your business legacy. We can provide post-EOT transition support, assisting your business in implementing leadership and management incentives, setting up tax-relief-eligible bonus schemes, and providing general corporate and trustee guidance.
Contact us on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact with you.
