An Employee Ownership Trust (EOT) is a trust established to own shares in a trading company for the benefit of the employees of the company, thereby creating indirect employee ownership.
An EOT usually has at least three individual trustees or a single corporate trustee (normally a private company limited by guarantee), with the three individuals who would be trustees of the trust appointed as directors of the corporate trustee.
Quite often, the corporate trustee route is used as it saves the administrative burden of dealing with the retirement/appointment of individual trustees.
This is because the appointment and retirement of directors of a private company is much simpler and requires less legal paperwork; for instance, there will be no need for a deed of retirement when a director ceases to act.
As acting as a trustee of an EOT brings with it significant responsibilities, trustees can also be sheltered from personal liability if they perform their role by acting as a director of a corporate trustee, which provides limited liability.
This is a significant benefit of using a corporate trustee, although it should be noted that the individuals who are appointed directors of the corporate trustee will still have duties and responsibilities arising from their role as directors of a company.
It is best practice for one of the individual trustees/corporate trustee directors to be an independent EOT trustee/director, for at least one EOT trustee/director to be a serving employee who is not on the trading company's board of directors and for one individual trustee/director to be either a director of the trading company or a selling shareholder. This EOT trustee composition is recommended to ensure that:
- Firstly, both employees (as the beneficiaries of the trust) and the selling shareholder(s)/board of directors of the trading company have representation at the trustee level, with the independent trustee bringing an impartial and objective viewpoint to help ensure that EOT trustees/ trustee directors as a whole act in the interests of the employee beneficiaries; and
- Secondly, the selling shareholders(s) (who, as per above, can be trustees/directors) do not have control.
The trustee director who represents the employees is often elected by the wider employee body and is typically someone that the employees feel is an appropriate fit for the role based on a number of factors such as their approachability, good relationships with employees at different levels of experience and seniority, good communication skills and knowledge of the workings of the business.
The role of independent trustee can either be occupied by an individual from a professional service provider who provides professional trustee services or by someone independent from both the selling shareholder(s) and the company.
Quite often, ex-professional advisers such as accountants or solicitors or persons with business experience such as non-executive directors are suitable candidates for the independent EOT trustee role, as people in these positions will have a good understanding of business generally and will be able to quickly familiarise themselves with the role and responsibilities required of them.
