Jane Ingleby talks with Kaira Clarehugh about employee ownership.
Jane is a Partner at Clarion with extensive experience in all areas of family law. She specialises in high-net- worth cases for married and unmarried couples and complex children law proceedings.
To get in touch call 07855 476 998 or email jane.ingleby@ clarionsolicitors.com
Kaira Clarehugh
Kaira is a Senior Associate in the Corporate team at Clarion. As well as advising clients on employee ownership strategies she also supports clients with acquisitions and disposals, private equity and investments, management buy-outs. and corporate restructures.
To get in touch call 07833 479 603 or email kaira.clarehugh@clarionsolicitors.com
Employees play a key role in the success of your business so it’s important to look after them in the same way you would any other valuable asset. For many employees this may be achieved through a combination of salary, benefits, bonuses, and profit share schemes but when it comes to those members of your team who are truly critical to the future of the business, it may be appropriate to offer them more.
What are employee share incentives?
Employee share schemes are a means of direct employee ownership in the business. They allow employees to own a part of your company, either by becoming a minority shareholder straightaway or by having an option to acquire shares at some point in the future, for example if certain targets are met or there is a sale to a third party. This gives them a vested interest in the future of the business beyond their next pay day and can demonstrate to them how valuable their contribution is.
If you’re going to give some of your company away however, you will want to be confident that it’s going to achieve the desired outcome. In order for such schemes to be effective, it is essential to structure the incentive in a way that will drive the particular behaviours that you want. They should align with your overall business objectives but also with the personal objectives and motivations of the employees that you want to incentivise. It is also important to ensure that the appropriate legal documentation is in place to cover the eventuality that an employee leaves the business, and the shares are capable of being bought back by the majority shareholder or the company at a determined price.
What are employee ownership trusts?
An employee ownership trust enables a company to become owned by its employees via a trust. Shares are held on behalf of employees as a whole in an employee trust, which must manage the shares in the best interests of all employees, in accordance with the terms of the trust deed and the law. This is indirect ownership as the employees do not themselves hold shares in the company.
Why would you consider it?
It provides a route to exit for founders who might otherwise believe their options are limited to a trade sale, management buy-out, or listing – and one whereby their business will continue in its own right and with its own identity, culture, and values rather than being swallowed up by an acquisition or merger. It can also prove a tax- efficient way to facilitate an exit plan.
Companies that have adopted an employee ownership model report significant positive outcome, in particular around improved business performance and innovation, enhanced levels of accountability, and a heightened sense of ownership and belonging.
How would you go about setting this up? Your first port of call is to identify advisers with the understanding and experience to support you; not all advisers have the requisite technical capabilities or track record in employee ownership to be able to advise you properly.
Your advisers will help you understand the various mechanisms for achieving employee ownership and identify the one best suited to the objectives you’re seeking to achieve:
- Direct employee ownership: where (usually by using a tax advantaged share option plan such as Enterprise Management Incentives) employees are registered individual holders of a majority of the shares in their company.
- Indirect employee ownership: where shares are held collectively on behalf of employees, typically though an employee trust.
- A hybrid model: combining individual and collective ownership.
What are the benefits?
For this, let’s turn to a client of ours who we worked with in March 2022. Craggs Holdings, which is the parent company of Craggs Energy and Moorland Fuels, put in place an Employee Ownership Trust (EOT) which saw the shareholders transferring 100 per cent to an EOT.
Chris Bingham, Group Chairman said: “I’ve been considering the option of employee ownership for quite some time and when we looked into the benefits and alternatives available to us, an EOT was the obvious choice as it allows the existing shareholders to plan their exit over a longer term while transferring the benefits to the employees.
“As successful and ever-growing businesses, we could have sold to a third party, however, I place great value on my team and wanted to be able to reward the people who have grown the businesses to where they are today.
“As far as I am aware, we are the first fuel distribution company in the UK to transfer 100% of our ownership to an EOT. The response from our shareholders and our staff has been extremely positive and there has been an increase in productivity and motivation which I’m sure will help to drive future growth. There’s no doubt in my mind that creating an employee-led business is a good thing, and it would be great to see more companies consider the EOT route rather than a traditional trade sale.”
