Indirect / employee trust ownership
The indirect model of ownership (often referred to as the ‘John Lewis’ model) is based on an employee trust owning shares in the business on behalf of the businesses employees (known as beneficiaries)
The employee trust, typically, holds shares with no intention of selling them and any benefit derived from holding these shares is solely for the employees of the business.
An employee trust established after 1st April 2014 will typically be an ‘Employee Ownership Trust’ or ‘EOT’.
One of the compelling arguments for indirect ownership is that it ensures long-term stable employee ownership because the shares held by the employee trust don’t need to be sold again in the future, whereas shares held directly by employees (direct ownership) will be regularly bought and sold when employees join/leave/retire and could lead to the business being sold to a 3rd party.
Additionally, the indirect ownership model is very simple when compared to the direct model of ownership; there is no need to understand how shares work, how they are valued, how they are bought or sold, etc.
Employees of indirectly owned businesses typically benefit from receiving cash bonuses linked to profit. Other benefits might be enhanced terms and conditions, health care, use of holiday homes, etc. Where an employee owned trust owns a controlling interest in the business it is possible to pay an annual income tax exempt bonus to qualifying employees (for more information about the ‘income tax exempt’ bonus click here).
Trustees manage the employee trust and a ‘trust deed’ details the purpose of the employee trust and the power and duties of the trustees in managing the affairs of the employee trust. The key duty of trustees is to act in the best interests of the beneficiaries.
The Trustees take on the role of shareholder and are able to influence key decisions that affect the company such as appointing and removing directors, the sale of the Company or its subsidiaries, acquisitions of other businesses or joint ventures, etc.
Employees are ‘beneficiaries’ of the employee trust, rather than direct shareholders. Therefore, employees have no right to any dividend, nor do they own shares they can sell when they leave the business, nor do they have a right to vote as shareholders on key matters affecting the Company.
- Simple to understand and long term stability as the employee trust would never need to sell the shares.
- Possible to enshrine some principles and guidelines into the Trust Deed to guide the Trustees to ensure that the Company operates in a certain manner.
- As nobody other than the employee trust would own shares there is no requirement to find money to buy shares when employees leave
- Where an employee ownership trusts owns a controlling interest, the employees can benefit from annual income tax exempt bonus.
The employees are not direct shareholders – they have no right to vote on matters that affect the Company.
Employees have no right to dividends, as they are not direct shareholders.
If the value of the business increases the employees will not benefit from this as they don’t directly own shares which could have increased in value.
Unless the employee trust owns a controlling interest, bonuses paid via the employee trust will be tax inefficient.
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.