Benefits and Requirements of Employee Ownership Trusts

Our specialist corporate and commercial team has recently completed another Employee Ownership Trust deal. The deal was worth in excess of £1 million with a large proportion of the purchase price paid upfront on completion. We led on drafting the trust deed and the share purchase agreement together with the ancillary documents required to be put in place to facilitate the transaction. We were able to work alongside our client’s accountants in implementing a bespoke mechanism to detail how the deferred consideration payable for the shares sold to the EOT would be payable to the selling shareholders post-completion.

Our corporate and commercial team has acted on a significant number of EOT deals for a wide range of clients in diverse fields such as the motor vehicle, IT, manufacturing and events sectors, in deals with a value of up to £50 million.

We’re seeing a growing trend towards EOTs as a preferred exit strategy and a key factor for this is the tax benefits available to selling shareholders. For instance, provided certain requirements and thresholds are met, an exiting shareholder may avoid a capital gains tax charge on the sale of their shares. Given the typical capital gains tax rate of 20%, this can represent a significant difference to the proceeds that a seller can expect to receive on an exit in comparison to a more traditional exit method.

An EOT involves setting up a trust (for the benefit of the employees) and it is important that thought is given early on as to how the EOT share sale is to be funded. There are a number of options that should be considered. Often, a combination of funding options is used as the implementation of one method in isolation may be unrealistic, or unattractive to one or more of the parties involved.

One option is for accrued profits retained in the company to be used towards the purchase price. Whilst it is unlikely that retained profits will be sufficient to cover the total purchase price, this element is often used as part of the payment made to the exiting shareholders on the day of completion. A second option, which often interlinks with the first, is for a portion of the purchase price to be treated as deferred consideration, payable to the exiting shareholders over a specified period of time post-completion. The way in which deferred consideration will be payable to the outgoing shareholders will need to be carefully considered. For instance, a defined proportion of profits in future financial years could become payable to the exiting shareholders, or a minimum payment could be payable in each quarter or each financial year. A third option is borrowing an element of the purchase price from a lender. Involving a lender is a useful way of raising finance, however, consideration should be given as to whether the lender will require any security to be granted in respect of the borrowing as well as the potential effect on the company’s ability to borrow in the future.

We appreciate that an EOT can be complex and it is important to fully understand the benefits available as well as the requirements that must be met for the available tax reliefs to apply. To assist, we have prepared a Briefing Note on Employee Ownership Trusts. We have also put together a more comprehensive Guide to Employee Ownership Trusts containing information as to how an EOT works and how it can be structured as well as outlining some of the tax reliefs that may be available to exiting shareholders. Please contact us if you would like a copy of our Guide.

We are happy to discuss employee ownership trust services that may be required without obligation. Please contact Senior Associate Solicitor Gemma Ritchie, or Associate Solicitor Dan Gorringe, in our corporate and commercial team on 01323 435900 or email gemma.ritchie@gabyhardwicke.co.uk or daniel.gorringe@gabyhardwicke.co.uk.

Previous ArticleNext Article