EOT Disputes: What Happens When Employee Ownership Goes Wrong?

Whilst EOTs are designed to foster collaboration, shared purpose, and long-term stability, in practice, navigating the disparate interests of different stakeholders presents its own issues, and could result in litigation.

When trust erodes, the consequences can be significant and this can impact morale, governance, and ultimately business performance.

Common challenges faced by EOTs include:

Seller’s continuing involvement in the business

The previous business owners often struggle to “let go” after transitioning to an EOT.

Often, the former owners (the selling shareholders) will continue to stay involved in the day-to-day management of the business following the sale of their shares to the EOT They will likely remain on the board of directors of the trading company and, quite often, are one of the trustees of the EOT.

It is the trustees' job to ensure that the business is run in the best interests of its employees, as the beneficiaries of the EOT, rather than how the business has historically operated. If the two business approaches differ then this inevitably gives rise to conflict between the former owners and the trustees.

Whilst the experience of the seller is often valuable, excessive former owner involvement in shareholder decisions risks undermining trustee decision-making and can create confusion about who ultimately holds authority. This interference can lead to governance paralysis and resentment among employees who expected a genuine shift in control.

Valuing the business

Prior to the sale of the shares to the EOT, a valuation of the company will need to be obtained and agreed by the selling shareholders and the trustees as the valuation placed on the business will ultimately determine the purchase price that the selling shareholders will receive.

Usually, on the completion of a sale of a company to an EOT, an initial cash payment is made to the selling shareholders as partial payment of the purchase price and the balance remaining is satisfied by way of deferred cash instalments, which will be paid utilising the profits of the business over several years.

As such, the trustees must ensure that the company is not overvalued at the outset of the transaction (and legislation has now imposed a statutory duty on trustees to ensure that this is the case) and that the proposed deferred payment schedule does not hinder business cash flow.

Ensuring that a fair valuation is obtained is therefore a vital task for the trustees to ensure the long-term success and stability of the EOT.

Given the competing interests of both parties, friction can naturally emerge between the former business owners (who want to achieve the best possible price for the business) and the trustees of the EOT (who want to ensure that the price is fair market value and that any long-term payment plan is sustainable). 

Poor governance

If the EOT is poorly governed and the governing framework is unclear, tensions can arise.

The governing documents must clearly set out the framework for dealing with important decisions, and this can include, for example, who approves significant business decisions, how conflicts of interest between trustees are dealt with and how the interests of the employees are protected.

Employee unrest

If employees feel disconnected from decision-making (noting that the board of directors will have day-to-day management of a company owned by an EOT), or there is perceived inequity in rewards, frustration builds. This often manifests as reduced engagement, decreased turnover, or vocal dissatisfaction. In an EOT, where employees are stakeholders, unrest can escalate into formal grievances or collective action.

Trustee disfunction

Trustees are the linchpin of an EOT. If trustees fail to act transparently or communicate effectively, confidence erodes. Silence from trustees during critical decisions such as profit allocations or strategic changes for example can trigger suspicion and conflict amongst employees.

It is much easier to prevent, rather than cure and therefore the best way to handle disputes is to stop them from arising in the first place. EOTs can reduce risk by implementing:

Clear governance frameworks

Clearly define trustee roles (for example if the trustee is a corporate entity by including clear provisions in the articles of association of the trustee company), decision-making authority, and escalation routes from day one.

Regular communication

Provide regular updates from trustees and open forums for employees to ask questions. Consider forming an employee engagement committee where employees can voice their concerns and suggestions.

Founder transition plans

Formal agreements limiting founder involvement post-sale.

Shareholders’ agreement  

Where the selling shareholders maintain a minority shareholding in the company, a shareholders’ agreement can assist with the regulation of the relationship with the majority shareholder (being the EOT) and the company itself. 

Cultural integration

Workshops and engagement programs to embed shared ownership values across the business. A strong culture is the glue that holds EOTs together.

Financial transparency

Publishing clear timelines for profit distributions and maintain open books where possible.

Additional safeguards

Early dispute resolution clauses

Include mediation and arbitration provisions in the sale agreement and trust deed. These mechanisms provide a structured, cost-effective way to resolve tensions before they spiral into litigation.

Independent reviews and governance audits

Commission regular external audits of governance practices and trustee performance. Independent oversight reassures employees and identifies issues early.

Know when to seek legal advice

Trustees and leadership should be aware of these triggers for obtaining independent legal guidance such as persistent founder interference or employee unrest. Acting early can prevent minor disagreements from escalating and becoming formal disputes.