Hybrid Employee Ownership
Here at RM2 we help create employee share plans that operate alongside Employee Ownership Trusts (EOT) to offer employees a direct ownership stake in the company, all tailored to meet your specific business objectives. Our hybrid ownership process involves defining goals, selecting the right scheme, designing and modelling it, implementing it and ensuring compliance. We also offer ongoing support to ensure the success and compliance of your scheme with the law relating to both the plan and the EOT.
What is hybrid employee ownership?
Hybrid ownership or the combined model of employee ownership of a company is achieved through a combination of a stake of over 50% of the company’s shares being held via an Employee Ownership Trust (indirect ownership), alongside shares or share options being held by individual employees, often via the use of an employee share scheme (direct ownership).
Awarding staff shares in a company can develop a real sense of ownership and may ultimately increase loyalty and engagement. Share ownership can help align employees’ interests with those of other shareholders, driving growth and increasing share value.
To find out more about employee share schemes, get in touch to ask us a question.
25 years' experience in employee ownership trust and third party sale transactions.
Jonathan Crookham
Senior ConsultantDownload free Fact Sheets for more information
Can you have a share scheme in a business owned by an employee ownership Trust (EOT)?
Yes you can have a share scheme in a business owned by an employee ownership trust. The EOT must own a controlling interest in the company, being a minimum of 50%+ of the equity (which means voting rights, dividend rights and rights to a return on capital). However, provided the EOT’s interest does not drop below that amount, the remaining equity can be used to achieve direct share ownership arrangements for employees.
What benefits does an employee share plan provide for an EOT owned business?
An EOT-owned company, like any other business, will want to incentivise and reward key people, helping with retention and recruitment of skilled individuals, whilst improving productivity. This will include providing different levels of reward, and hence motivation, according to the roles and responsibilities of identified key individuals.
This may be of particular importance where a new management team has been, or is to be, put in place as part of the original owner’s succession planning.
A direct shareholding for individuals can deliver the possibility of dividend payments in addition to the all-employee EOT tax-free bonus and profit share that can be paid by the EOT controlled company.
A share plan for key personnel can also provide a route for additional rewards based on specific performance, provided that an internal market is in place to provide a liquidity route for the shares (given that a third-party sale is generally not planned in an EOT environment).
It is important that the next generation of key individuals can see a potential for capital-based financial return on their shares in the medium to long term, particularly during the period when the vendors’ debt is still being repaid by the EOT. An internal market can also ensure that shares can be purchased for value from employees who leave the business.
Equally important can be cementing the concept of employee ownership amongst all employees by creating an all-employee share plan giving a greater feeling of ownership and sense of community within the company.
Finally, it is possible that some EOT businesses will change their ownership structure in the future. Should a sale occur, direct shareholdings can deliver individuals an additional equity-based reward in the form of sale proceeds at that time. There are specific rules relating to shareholders who own 5% or more of the EOT owned company’s share capital, so care should be taken when setting up any employee share plan.
Contact us about a hybrid employee share scheme today enquiries@rm2.co.uk
What share plans are available to EOT owned companies?
EOT companies can, in theory, operate any of the HMRC tax-advantaged schemes available such as the Enterprise Management Incentive Plan (EMI) Company Share Ownership Plan (CSOP) or Share Incentive Plan (SIP). This is the case even if the EOT company is technically under the control of another corporate body, which will be the case if the EOT trust is a company. Tax advantaged share plans all have their own qualifying criteria, so it is important to check wider qualification issues.
EMI options are very flexible and tax efficient and can be offered to key individuals or all employees. If the company doesn’t fit the eligibility criteria for EMI (gross assets of no more than £30m and fewer than 250 full time employees, certain trading activities are excluded), then CSOP options could be a viable alternative. Or the SIP could be a better cultural fit if looking to award shares to all employees on a same terms basis.
Hybrid Ownership Share Plans
What are the challenges when using a share plan in an EOT owned company?
Share schemes are a practical way for companies of all sizes (at whatever point in the business life-cycle) to achieve a number of highly valuable benefits, however there are some considerations that need to be taken into account:
Share Class
In order for an EOT to continue to meet the controlling interest requirement, the EOT trust must have rights to the majority of the ordinary shares, the votes, the dividends and the assets on a winding up. Often a company may wish to use a different class of share for their share plan. This is possible but you will require specialist advice on the design and implementation of your plan to ensure that your EOT remains compliant and the share scheme will deliver what you hope it will.
Valuation
The great majority of EOT transactions are paid for by way of an initial payment to the sellers, with the bulk of the consideration paid over a number of years on a deferred basis. Payment is made out of the company’s ongoing post-tax profits, which the company undertakes to provide to the EOT trustee. Therefore, immediately following an EOT transaction, the company effectively owes the EOT a significant debt.
At this stage, it can be argued that the company, and its shares, carry a lower value, although that value will be rebuilt whilst the debt is being repaid. Companies establishing share plans are generally advised to make share or option awards to employees at a time when the shares’ value is low to maximise potential value growth for participants, so it makes sense for share plans to be implemented as soon as is practicable after the EOT transaction has completed. However, it should not be assumed that the company’s shares immediately post-completion are worthless or only of nominal value. EOT companies often have a strong trading history and will most likely have calculated future profits with care, so there will be some value in the company’s shares. At RM2 we have a superb track record of agreeing valuations with HMRC.
Excluded participators
Should the EOT company be sold, the proceeds obtained by the EOT trust must be applied for the benefit of all the eligible employees in the business. However, if any employee holds 5% or more of the share capital (or 5% of any class of share capital in the company) – or holds rights to 5% or more of the share capital or any class of share capital – they will be excluded from sharing in any proceeds received by the EOT trust itself.
Working out how many shares employees should be able to acquire under a share plan will still need careful consideration. Furthermore, as noted above, if different share classes are introduced, the 5% rule does not apply to the whole of the company’s shares, but to that particular share class.
RM2 can help you manage these issues through careful equity modelling or by drafting employee share plan and constitutional documentation to ensure shares cannot deliver rights of any type that break the “excluded participators” 5% rule.
Internal share market
Without an exit route it is hard to create any liquidity in an EOT-owned company’s shares. To make direct share ownership in an EOT company more meaningful, it may be necessary to create an internal market for shares, enabling employees to sell their shares for value when they cease employment (usually as a “good leaver”), or at an appropriate time.
It is not appropriate for an EOT trust to act as a market maker. It is not possible within the terms of the legislation for the EOT trust to award shares or options to individual employees or use any of its funds to purchase shares from any individual employee.
If an internal market is required, it may be advisable to establish a separate employee benefit trust (EBT), which could also be used to make option grants under tax advantaged employee share plans.
A Share Incentive Plan could be established with a special SIP trust, which would create an internal market for employees. However, once a SIP trust has acquired shares, those shares may only be awarded to employees under the SIP rules (i.e., to all employees, on similar terms). RM2 can establish and act as trustee to both an EBT or SIP Trust.
Dividends
Employees may benefit from dividends being paid on the shares they own. However dividends should not be paid on shares delivered under an employee share plan until the EOT debt has been repaid.
Download free Fact Sheets for more information
How can RM2 help?
If you already have an EOT holding shares on behalf of all your employees and now want to incentivise key personnel through an employee share plan, you will need specific advice tailored to the unique needs of your company and how your EOT has been structured.
If you are still considering transitioning to an EOT we can provide a complete tailored solution solution for your EOT transaction and subsequent share plan.
Here at RM2, we have one of the most experienced employee share ownership teams in the UK and are employee owned ourselves. We do not advise on anything apart from Employee Ownership Trusts and employee share plans. It’s all we do, and we do it very well.
Our multi-disciplinary team includes accountants, solicitors and share plan administrators, who work together to deliver the UK’s only ‘cradle to grave’ service, from the initial design of your EOT transaction or share plan, through implementation and ongoing administration to ensure compliance throughout the life of your share ownership arrangements.
We have successfully completed over 100 EOT transactions and designed and implemented more than 2,000 employee share plans, and routinely look after the compliance and administration needs for these plans throughout the year.
Speak to us about hybrid ownership schemes today – enquiries@rm2.co.uk
For advice on the many different types of employee share scheme and how each can be tailored to match the needs of your business, please get in touch.
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