For example, 80% of a Company’s shares could be held by an employee trust with the remaining 20% directly owned by the Company’s employees.
There are no fixed proportions for this shareholding split, but typically the employee trust will own a controlling stake in order to exercise control over the Company for the benefit of all employees.
The compelling argument in favour of the hybrid model of ownership is that it combines the various benefits of both ‘direct’ and ‘indirect’ ownership whilst reducing their respective downsides.
The shares held by the employee trust can be ‘warehoused’ for the long term to ensure that the Company runs for the benefit of all employees. The shares held directly by employees will allow them to receive dividends, share in any increase in value of the business and allow employees to individually influence the business through the voting rights attached to the shares.
As with the ‘direct’ model there might still be a need to finance the purchase of shares from employees when they leave the business, but if the vast majority of shares are held by the employee trust the purchase of a minority of shares will be easier to finance.
The employee trust can act as a ‘market maker’ and purchase shares from outgoing employees and sell shares to new employees.
|Benefits of hybrid model||Potential downsides|
|+ Majority of shares can be held in the employee trust to secure long-term employee ownership. The employee trust acts in the interests of ‘all’ employees.||– Depending on the voting structure, the employee trust is likely to be able to determine the outcome of all key decisions – might be seen as undemocratic by employees?|
|+ Minority of shares can be held directly by employees giving them the legal right to attend AGM, receive dividends and benefit from any increase in the value of the business.||– The employee trust doesn’t normally receive any income. Therefore it is reliant on the Company to provide funds to allow it to purchase shares.|
|+ Employee trust can act as ‘market maker’ and purchase shares from employees who leave (subject to it receiving ‘gifts’ from the Company).||– Management and administration of the employee trust (compared to direct ownership).|
|+ Employee trust could sell shares to new employees.|
|+ Payment of annual ‘income tax exempt’ bonus where Employee Ownership Trust owns a controlling interest.|
How can we help?
If you are exploring employee ownership, we can help you to identify the most appropriate model to suit your objectives. We are happy to meet at client’s offices, or at our London office, without charge or future obligation. Please contact us for an initial discussion.