Two big questions
Anyone, anywhere in the world, planning employee ownership (EO) has two big initial questions to answer. Firstly, are you really interested in EO, rather than employee share ownership (ESO)? And, secondly, what type of EO works best for your business?
EO or ESO?
If you’re considering EO, that suggests you’ve already answered the first question positively. EO means a significant sized shareholding held by or on behalf of all employees, a shareholding that supports genuine employee engagement. So, in order to have EO, all employees must have a significant and meaningful stake in their business. This contrasts with, say, executive only share plans and even all employee plans over an insignificant minority percentage of shares that only deliver financial benefits to employees. Carefully implemented employee share plans can work well but it is clear from research that EO is more likely to increase business performance, employee well-being and deliver wider benefits.
What type of EO?
The second question is, what type of EO works best for your business? The employees’ shareholding can be owned (a) directly by employees, (b) indirectly by a trustee on their behalf, or (c) you can have both types of ownership. In summary, would you like direct, indirect or hybrid EO?
In order to answer this second question you need to understand the employee ownership trust (or EOT).
The purpose of an EOT
The purpose of an EOT is to provide permanent or long-term EO of a company, through holding a significant proportion of a company’s shares on trust for the benefit of all the company’s employees. This usually means holding over 50% of the shares and, unless there’s a hybrid EO model, most will build the holding up to 100% of a company’s shares. In the UK, the Government provides tax benefits when an EOT holds a controlling interest.
A key characteristic of an EOT is that individual employees do not get awards of shares, they do not have beneficial ownership of any of the EOT’s shares. The trustee holds its shares on a discretionary trust for the benefit of all present and future employees, as an ever changing class of beneficiaries.
Practical advantages of an EOT
An EOT has clear practical advantages over direct employee ownership, that can be summed up as “fewer moving parts”. EOT ownership neatly side-steps the upfront and ongoing administrative complications, and communication issues, around individuals buying and selling shares. Moving to EO is easier with the only parties to the transaction being the sellers, the trading company, the trustee and, perhaps, a bank, if there’s bank finance involved. And once the EOT’s share purchase has been fully paid, the trustee’s role is focussed on ensuring the trading company operates as a successful, professionally managed trading enterprise with an EO ethos.
From a practical point of view, including minimising ongoing costs and financial burdens, an EOT is a clear winner over direct EO.
Strengths as an EO model
The next element of understanding the EOT is to appreciate its strengths as an EO model. It’s designed to provide EO over the long term through the trustee’s custodianship of the trading company; ensuring employees have informed individual and collective voice and that they share in the success of the company, normally through cash bonuses. Once the consideration for an EOT's shares has been paid, profits that would previously have gone out as dividends can be paid as all-employee bonuses. Employees can leave and join without worries over whether they are selling low or buying high, as happens with direct EO. The trustee can resist a takeover attempt even though it is very financially attractive to a current generation of employees because that change in ownership would be contrary to the purpose of the EOT and the trustees’ duties as a fiduciary.
Some will prefer the dynamics of direct EO: the incentive effect of employees investing their own money and watching the share price go, hopefully, up and the ability to vote personally at a general meeting. These effects can be captured through a hybrid model, with, say, an EOT holding a majority stake and the employees owning some shares personally, that they can buy and sell on an internal market.
Trustee board composition
Clearly the choice of trustee, and the composition of the trustee board, is paramount. Good practice in the UK is to have your own trustee company with a paritarian board: one comprising representatives of senior management and the same number representing employees as a whole. Each group can appoint and remove “its” trustee directors and there is usually an independent chair.
Day to day management remains with the trading company’s management team, who may include directors specifically selected or elected to represent employees’ interests. There is also likely to be an employees’ council that interacts regularly with the trading company board. In this way the trustee board is free to act as custodian of the company’s EO ethos.
The UK answer
How is the question, direct, indirect, or hybrid EO being answered in the UK? Overwhelmingly it’s answered, indirect or hybrid.
The U.K. EO sector grew by over 300% from 2014, when the U.K. started promoting the EOT, to June 2020. Well over 90% of that growth was from companies adopting the EOT ownership model. When these statistics are next updated we will see that the annual growth rate of the UK EO sector has increased even more, all because of the EOT. These statistics exclude small worker coops where numbers have remained steady.
EO as a business succession solution …
The main driver behind the new EOTs now being created each week in the UK is as a business succession solution for private company owners. Any owner considering a move to EO will quickly appreciate the advantages this offers compared to, say, a trade sale. It avoids sharing trade secrets with competitors and gives control over timing.
… especially using an EOT
But if you explore motives more closely you will find specific aims among those choosing EO as an exit solution, regarding legacy, preserving a company’s independence and ethos and achieving the right sort of stable long-term new ownership for a company. These are all aims that the EOT can help fulfil and more so than with direct EO because these aims can be written into the EOT’s constitution. Increasingly wider corporate purpose is important. This is something that the EOT can also support.
A flexible solution
It is worth emphasizing that companies moving to EOT ownership have previously been owned in a variety of ways, ranging from listed company ownership through to directly employee-owned companies that have switched to EOT ownership. EOT ownership can apply to companies whatever the size and nature of the workforce. The EOT model can cope well with seasonal workers and an international workforce. The EOT model is proven to work whatever the nature of a company’s business; whether producing goods or services or both.
Example EOT owned companies
|Allford Hall Monaghan Morris
|Beta Valve Systems
|E. A. Gibson
|Founders and investors
|Founders and employees
|Riverford Organic Foods
|Organic veg boxes
Once you’ve made your choice then obviously other factors need considering before taking action, especially financing and the relevant regulatory regime.
In some countries tax rules can get in the way of a move to EOT ownership. A sale to an EOT is possible in the UK and US. There’s a workaround in Australia.
Tax rules can also provide a powerful incentive to change your plans, particularly if it’s much more tax effective to adopt one model of EO rather than another. What is important is to have a clear idea of the type of EO you want commercially, and why, and to try to achieve that, rather than start with, say, tax deciding the future of your business.
In summary, if you’re interested in EO, then weigh up the merits of the different models including the EOT so you can answer the big question, what type of EO is best for your business? More frequently in the US and almost always in the UK, the answer is the trust model, the EOT. This article encourages you to look more closely at the EOT.
Graeme Nuttall, partner, Fieldfisher, London
Defining employee ownership:
Nuttall, G. (2012). Sharing success - The Nuttall review of employee ownership. (U.K. Department for Business, Innovation & Skills)
Nuttall, G. (2020). EO v3.0 - Employee ownership with added Gandhian purpose. (Fieldfisher)
Employee Ownership Association (2020). What the evidence tells us.
UK examples and technical articles:
Nuttall, G. & Gearing, M. (2021) Over 50 employee ownership articles by Fieldfisher's experts (Fieldfisher)
Fieldfisher (2021) Latest Employee Ownership news and views
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