An Introduction to Employee Ownership Trusts
Providing readers with an easy to understand overview of this compelling employee ownership structure. A 'must-read' for anyone considering a transition to employee ownership as an alternative to selling their business. It will also serve as an invaluable introduction to professional advisers and lenders interested in participating in this growing sector.
Should EOT trustees ever be offshore?
I hope that headline has grabbed your attention, because for some this is a controversial topic.
Clearly, the aim of the Employee Ownership Trust (EOT) legislation is to encourage more broad-based employee trust ownership of UK businesses, and with that normally comes a healthy injection of employee democracy, or at least employee input, to the governance of the firm. Normally, the trustee would be a special purpose company, set up to be nominally a subsidiary of the founding company, and whose directors are the intended individual trustees of the EOT, including (usually) significant representation from employees themselves.
So why would an EOT company ever entertain the idea of its EOT being controlled offshore by a professional trustee company? This seems at odds with the spirit of the legislation.
I think there are two main justifications, and these need to be considered on a case by case basis.
The first justification is that, although EOT structures are intended to be long term, it is nigh on impossible in the ever changing world of business to say “we will never be sold”. Everyone may go into an EOT with the intention of it being very long term, and the trust deed might contain some provisions to guard against a future generation of employee owners being tempted to cash in at the expense of the preceding generations, but it is surely a step too far to say that employee ownership must be permanent. I have been in many situations where a sale of a company was in the best interests of the company and its employees. To have tried to frustrate this would have been highly irresponsible. In the event of a future sale, it is the EOT that pays the original vendors’ capital gains tax bill. In other words, the employee beneficiaries foot the bill. That seems unfair, and is surely a point we should be lobbying to change. By locating the trustee offshore, the EOT is outside the scope of UK capital gains tax in the event of a clawback of tax being triggered when an EOT company is sold.
The second justification is that professional trustees can act as a strong bulwark in the governance of an employee owned business. Too often I have seen strong willed vendors (and occasionally strong willed executives) dominate an employee owned business by strength of personality, to the extent that less experienced employee trustees can become captive, unable to properly challenge risky decisions such as big acquisitions or inappropriate decisions such as excessive executive pay. Professional trustees are less likely to be pushed around. Many will still accommodate employee input, including full representation on the board of trustees, provided the offshore domiciled trustees are in a clear majority.
While we believe an onshore trustee will be appropriate in the vast majority of cases, we think advisers and EOT promoters should be open-minded about the possibility on a case by case basis.