Employee Ownership Trust – How is a Sale Structured?
We know that when an Employee Ownership Trust (EOT) structure is implemented, the shareholders dispose of their shares to a Trust for the benefit of the employees, but how are the selling shareholders paid for their shares?
It is possible for the EOT, or the trading company, to obtain bank funding to purchase the shares, but in practice this is rare. It is more common for the trading company to fund the purchase from trading profits.
Typically, the company will gift profits to the EOT which the EOT can then use to pay the shareholders. Gifts are generally preferable to loans as these do not give rise to any loan charges, albeit the gifts are not tax deductible for the company.
At completion, there is normally an upfront payment made to the vendors in exchange for their shares, with the balance left outstanding. The balance is paid to the shareholders in instalments from the company’s future trading profits in line with a Share Purchase Agreement. A share valuation exercise will be carried out to ascertain the purchase price.
It is crucial that clearance is sought from HM Revenue & Customs prior to the sale to ensure that there will be no unwelcome tax charges for the vendors on the disposal. If HM Revenue & Customs are satisfied that the conditions, as detailed in our previous article, are met they usually provide clearance within a couple of weeks to allow the sale to proceed.
Once the shares have been purchased by the EOT, the directors of the company will continue to be accountable to the shareholders, however, it is the Trustees of the EOT that will have the ultimate decision-making powers given the EOT has a controlling interest in the company. The Trustees are required to act in accordance with the Trust Deed; the document which establishes the Trust and sets out the objectives of the Trust. The legislation does not stipulate who should be appointed as a Trustee, and it is therefore possible for the selling shareholders to be appointed along with other individuals or corporates as appropriate.
If you are considering selling your shares to an EOT, or would like more information, please contact our Employer Solutions team.
In our next article we provide a case study example of a company we assisted in its transition to employee ownership. You can also read our previous article on ‘Qualifying Conditions for the Different Tax Reliefs’ here.