Selling a company owned by an Employee Ownership Trust (EOT)

When an Employee Ownership Trust (EOT) becomes a company’s controlling shareholder, this is usually intended to be a long-term arrangement. Employee ownership is designed to provide stability, independence and shared success for the benefit of employees.

However, as with any business structure, circumstances can change. Markets evolve, opportunities arise and strategic priorities shift. In some cases, it may become necessary to consider whether employee ownership remains the right model for the company.

Although an EOT is designed to provide long-term employee ownership, an EOT-owned company can in principle be sold in the future if that is in the best interests of the EOT’s beneficiaries. Any such decision requires careful review and robust decision-making by the trustees.

When might a sale need to be considered?

This is not common but it does happen.

Reasons might include:

• The company’s growth making it an attractive acquisition target, resulting in an unsolicited and substantial offer
• Changes in the market meaning the business may be stronger as part of a larger group
• Access to stronger leadership or additional capital
• Strategic merger opportunities that enhance long-term prospects
• Financial distress or insolvency requiring a restructuring

Each situation will be highly fact-specific and must be considered carefully in the context of the trustees’ duties.

The two main sale scenarios

1. Sale of the company owned by the EOT

In this scenario, the trustees decide to sell the shares held by the EOT, for example, to a strategic buyer or as part of a merger.

Key points include:

• The trustees must decide whether the sale is in the best interests of the EOT’s beneficiaries (mainly the employees).
• The EOT receives the sale proceeds in one or more tranches
• The EOT will pay expenses of sale and any tax due (see below)
• The proceeds must generally be applied for the benefit of all beneficiaries on the same terms, typically by way of a special bonus or distribution in accordance with the trust deed.
• The structure of the transaction must preserve compliance with EOT legislation and the terms of the trust.

2. Sale of assets by the Company 

Not often seen but still a possibility, the company’s assets are sold and the proceeds are used to pay creditors (often where the company becomes insolvent).

If funds remain after creditors are paid:

• The balance is distributed to the EOT (and any other shareholders)
• Sale expenses and any taxes are paid
• Any funds received by the EOT must generally be paid to beneficiaries on the same terms and in accordance with the trust deed and statutory requirements.

Both scenarios require careful legal and tax analysis.

Key questions and steps to consider

If a potential sale is on the agenda, the following will need to be considered:

1. Is it right to be considering a potential sale?

• • Are there particular commercial pressures making a sale necessary?
  • has there been an unsolicited offer that merits serious consideration?
  • Or does remaining employee owned continue to serve employees’ best interests?

Trustees must approach this decision objectively and in accordance with their fiduciary duties.

2. Who decides?

Where an employee ownership trust is the controlling shareholder (it nearly always will be), any decision on a possible sale must be made by its trustees.  They must:

• act in the best interests of the EOT’s beneficiaries
• take appropriate professional advice
• ensure the decision making process is properly documented

3. Does anyone else have a say?

Although the trustees hold the decision-making power:

• the company’s directors may have views on future strategy and direction
• minority shareholders (if any) will have a direct interest
• and former owners may be affected if a sale triggers tax liabilities for them (see below)

4. Are there any impediments?

Sometimes the EOT’s structure will contain hurdles that intentionally make a sale more complicated which will need to be carefully reviewed and safely navigated around. For example, where the EOT has not yet paid the former owners of the Company for their shares, they may have the right to veto a sale.

5. What are the tax consequences?

A sale will likely result in tax consequences for:

• the trustees or the company’s previous owners, and
• possibly employees if they share in the net proceeds

The tax position can be complex and will depend heavily on how the transaction is structured and how much time has passed since the EOT became a controlling shareholder.

Early professional tax advice is essential to ensure compliance with EOT legislation and to understand the full implications.

6. Terms of the sale contract?

Questions which the trustees must carefully consider might include:

• does the buyer want any part of the purchase price to be linked to future performance (earn out)
• is the buyer seeking warranties about the company from the trustees, and if so will the original sellers provide these or might they be the subject of a special insurance policy

7. What happens in the EOT after the sale?

If net sale proceeds are to be paid to beneficiaries, this must be done with care to ensure compliance with the terms of the trust deed and to  prevent avoidable tax leakage. Earnout or other deferred consideration will delay the winding up of the EOT.

How we provide support  

Selling a company owned by an EOT is legally and commercially complex. It requires careful navigation of and clarity about:

• trustees’ legal duties
• the company’s governance structure and constitution
• Legally how the sale transaction can be structured, in particular to minimise tax leakage for the company and trustees
• How to communicate with the employees
• Other stakeholder sensitivities

We provide comprehensive support to companies and trustees to ensure the smoothest possible and safest passage through to a successful sale.

Contact us

If you are considering a sale of a company owned by an Employee Ownership Trust, whether exploratory or imminent, early advice is critical.

Contact us to discuss your situation in confidence and ensure the interests of trustees, the company and its employees are properly protected.

Call us on +44 (0)20 3818 9420
Email us at info@postlethwaiteco.com

Further reading: What happens when an EOT comes to an end?