Employee Benefit Trusts (EBTs) are trusts which can be established by companies to help with the operation of their employee shareplans. EBTs can be established onshore or offshore and can be funded by loans or contributions from group companies.
What is an EBT?
An EBT is a special form of discretionary trust established for the benefit of employees of a company and its subsidiaries. They are usually set up in conjunction with a particular share incentive arrangement but can be used for a number of purposes.
Why do companies use EBTs?
Employee trusts have received negative publicity when used as part of taxavoidance schemes. The vast majority of EBTs are, however, set up for commercial purposes that are unrelated to tax. The most common reasons for establishing an EBT are:
- to act as a mechanism to deliver free shares to employees. Companies cannot generally issue shares for less than their nominal value so an EBT can be used as a source of shares where an award has a low or nil exercise price;
- to acquire shares from employees (often those who are leaving employment). Where an employee is required to sell his or her shares on leaving employment, the EBT can purchase them and reuse the shares in providing benefits to other employees;
- to acquire and hold a 'warehouse' of shares and prevent shareholder dilution. An EBT can acquire and hold shares for the purpose of satisfying the exercise of incentive awards granted to employees. If the EBT acquires shares in the market, this guards against the dilutive effect that subscription share schemes can have. This is an advantage that EBTs have over treasury shares which, although an alternative means of sourcing shares for incentive arrangements, usually count towards any limits on dilution; and
- to provide an internal market. For private companies, an EBT can solve the problems that a lack of liquidity creates. Even for quoted companies where such issues do not usually arise, the EBT can represent a financially attractive market for employees' shares.