Obtaining an independent review of your employee ownership structure

Why would an independent review be useful?

Independent review and advice can be of assistance to owners, potential trustees and employees who are going through the transition process, and also to the sellers, trustees and employees for businesses where the employee ownership trust (the “EOT”) has already been established.  

An independent review of an employee ownership structure may be of assistance to transitioning companies where: 

• business managers approach owners with a proposed employee ownership succession plan; or 
• the trustees of the EOT wish to ensure that they are independently advised before the employee ownership structure is fully implemented and they agree to enter into the share purchase agreement.  

In each case the documentation for the employee ownership transition should be readily available and shared with the business owner, or the EOT, as the case may be. 

For already established EOTs the trustees and employees may wish to understand what kind of employee ownership should be in place, and whether what they see in practice matches the legal documentation. 

Sometimes employees may consider that the employee ownership structure which has been implemented doesn’t meet their expectations or, very occasionally, they were never informed that it had occurred. In such circumstances, what can the employees do and who may pay for that advice?  

Publicly available information 

There are some documents which will be publicly available at Companies House. We would usually expect that the articles of association (the constitution) of the trading company (the ownership of which would have been transferred into employee ownership by virtue of the EOT) will have been updated and these are required to be filed at Companies House. 

It is likely that these articles of association will have introduced provisions which require the EOT or the employees to be consulted on certain decisions. For example: the purchase of another business, a change of business or a material borrowing. It may also indicate whether the EOT has a role in the appointment of directors of the trading company. 

A second document, which will be publicly available, is the articles of association of the EOT company itself. The EOT company will be the trustee of the EOT and will have trustee directors who actually manage the EOT. It is the EOT company that will legally hold the shares in the trading company on behalf of the employees. The EOT company will be at least a 51% shareholder of the trading company, but this can be up 100%. The articles of association of the EOT company usually have the conditions for the appointment of the trustee directors and the governance of that company. 

Companies House records will also indicate when the owners of the trading company sold the company (which will be included in the next available confirmation statement and filed annual accounts) and confirm whether there is a mortgage over the assets of the company to ensure that the owners who sold the shares are repaid. 

Documents and information which is not publicly available 

The details of the employee ownership trust itself will be set out in a trust deed between the trading company and the EOT company. The trust deed is not a publicly available document. There will also be the sale and purchase agreement between the selling shareholders of the trading company and the EOT company (which will set out the purchase price for the business and over how many years that purchase price is to be paid), and this is also not a publicly available document. This information should be available for all the trustee directors of the EOT company as they will need these two documents together with the publicly available documents to carry out their duties. 

How do employees pay for advice on the EO structure? 

If it is a trustee director who is not aware of the EO documents and does not understand the EO structure they could ask for the trading company to pay for independent advice. There is often a condition in the trust deed which requires the trading company to pay for advice to the trustee directors. It would be expected that any such advice would eventually be available to all trustee directors. If you feel that the company has not been open about the employee ownership structure it is appropriate to seek independent legal advice and not rely on advice of the advisers to the trading company. 

If there are no employee trustee directors then, if employees consider it is unlikely that the trading company will pay for advice in the first instance, they may need to raise the monies themselves to obtain the independent advice. They could subsequently ask for the trading company to reimburse the employees if the advice produces a positive outcome for employees, the EOT and the trading company, but this may be at the director’s discretion.