Indirect Employee Ownership

Under this model, all or a percentage of the shares of the company are held indirectly on behalf of and for the benefit of the employees.

The most common structure for indirect ownership is in an Employee Ownership Trust (EOT). Most of the long established employee owned businesses in the UK have the indirect form of employee ownership in at least part of their ownership structure.

Each EOT or equivalent will have a number of Trustees, usually made up of employees, directors and often an external, independent Trustee. The Trustees hold any assets (the shares) in the EOT for the benefit of the employees. An EOT will normally have its constitution outlined in a Trust Deed and sometimes the Trust Deed will set out guidance over the future of the business. For example, it could protect the business from asset stripping, or ensure the longevity of employee ownership by stipulating that the interests of the future employees are considered alongside those of present ones.

Some companies use an EOT to hold all of the shares, often purchasing them from the existing owner or owners over a period of years. The EOT model is one which provides every qualifying employee with the same rights and benefits without the need to purchase shares directly with their own money.

The EOT may waive its right to a dividend payment in order to increase the cash available to be spent in the business, for example, to pay employee bonuses or investment in the growth of the business.

Consider these points if indirect share ownership is an option for the business:

  • Over what period of time do the current owners wish to sell (or gift) their shares to the EOT?
  • What percentage of the owners’ shares will be sold?
  • Who should represent the owners on the EOT, if they still retain shares or have a financial interest in the business?
  • Are there any special conditions required in the Trust Deed in order to protect the future of the business?
  • How will the business fund the purchase of shares from the current owners?
  • Will the employees feel a sense of real ownership of the business in the absence of being direct shareholders?
  • What are the tax implications for the company and employees of indirect share ownership?