Employee Ownership Trust (EOT)

If you have considered the possibility of an EOT for your business, you may have questions about the appointment and role of the board of trustees so in this article we will cover: 

• Why do you need a board of trustees?
• What can the board of trustees do?
• Who is eligible to be a trustee?
• Key considerations
• Next steps

Why do you need a board of trustees?

The board of trustees plays an integral role in an EOT. As a trust does not have separate legal personality, it requires an individual or corporate entity to administer and perform duties on its behalf – this is what is known as a trustee.

Following creation, various trustees will be appointed to manage the EOT in accordance with the terms of the trust deed. A trustee’s main duty is simple: to act in the collective best interests of all the employees as beneficiaries of the EOT.

What can the trustees do?

Whilst operational control of the company remains with the existing management team, the trustees are also responsible for preserving the long-term value and success of the EOT on behalf of the employees. This means they have a duty to ensure that the company is being managed in a way that benefits the employees.  

In order to achieve this, the Trustees are also granted powers to be involved in and make key decisions regarding the company in addition to management of the EOT. Such decisions include:

• Outlining the strategy and ethos of the company
• The use of company profits and the return of any surplus profits to the employees
• Appointing (or dismissing) directors
• The sale of shares
• Review of business performance

When carrying out their duties, the trustees must ensure their decisions are always in the best interests of the EOT and that they are not exceeding the powers granted to them under the trust deed.

The trustees also have to be mindful that their decisions contribute to the continuing success of the company: the interests of the employees and the interests of the company are not mutually exclusive, therefore the trustees will need to balance the goals and objectives of both in their decision-making.  

Who is eligible to be a trustee?

The trustee owes fiduciary duties to the EOT: a duty to act in good faith and with loyalty, to use reasonable skill and diligence, and to act impartially between beneficiaries, this means that the trustees need to be unbiased when making decisions and always act with the beneficiaries’ best interests in mind. If the trustee finds themselves in a position of conflict, then any conflicts of interest must be declared as soon as possible and managed appropriately.

Independence and integrity are therefore key requirements for a trustee. At the same time, it’s also beneficial for the trustee to have a good knowledge of the company, the sector and a good working relationship with the existing management team, to ensure a smooth transition to the EOT.

As a result, the trustee board is typically a mix of employee representatives, company representatives and independent trustees to create a balanced and effective trustee board. The trustees can be individuals, corporate entities, or a combination of the two. The selling shareholder can also form part of the board if they wish, which is greatly beneficial from a continuity perspective.  

It is advisable that the board has a minimum of three trustees to avoid any deadlock in decision making.

Key considerations

The trustees have a significant responsibility in performing their role. Therefore, it is important you carefully consider the appointment of your trustees prior to transitioning to an EOT, taking into account factors such as:

• The scope of their duties in the Trust Deed
• Their experience in the sector and knowledge of the business
• Any existing relationships with the company’s management team
• The number of trustee appointments for effective decision making
• Clearly outlining the process for appointment and removal of a trustee in the Trust Deed

Next steps?

Setting up an EOT typically takes between three to six months, depending on the complexity of the business and the availability of funding.

Therefore, starting early and involving experienced professionals from the start can help streamline the process.

For further information on Employee Ownership click here. Or to discuss how an EOT could benefit you and your business, please contact our Company & Commercial team.

What are the benefits of transitioning to an EOT? More about Employee Ownership Trusts