Legal briefing | Incentives & Remuneration | 31 May 2019

Passing the Baton – the founders that hand ownership of their companies to employees

Overview

Giving employees shares in the company they work for is often seen as an effective motivational tool. Some owners go even further and hand their workers a controlling stake in the business by transferring it to a specially formed employee ownership trust ("EOT"). John Lewis is often cited as the classic example of an employee-owned company but there are many others including global operators, PA Consulting and Mott MacDonald.

The model appears to be growing in popularity as entrepreneurs looking for a full or partial exit, recognise it as a means of preserving the culture and ethos of the business they have worked hard to establish. Employeeowned companies are reported as having greater productivity, lower rates of staff turnover and a heightened sense of corporate social responsibility.

In early May, the founder of Hi-Fi and TV retail chain, Richer Sounds, transferred 60% of his shares to an employee ownership trust citing succession planning as a key motivation. This follows other well-known companies that have recently chosen this route including Wallace & Gromit creators, Aardman animation and organic delivery company, Riverford Organic. The government recognises the value of employee ownership and offers tax incentives for EOTs, including capital gains tax relief for sellers and the ability to give employees annual tax-free bonuses of up to £3,600.

If you are looking towards an exit for your company but would like to consider an alternative to a traditional management buy-out or third party sale then the EOT route might be for you. There are important issues to consider such as how the EOT will be funded, whether the conditions for tax relief will be met and the extent to which management want to stay involved with the company.

We would be happy to discuss any of these matters with you further and answer any questions you may have. Please do not hesitate to contact a member of the Travers Smith Incentives and Remuneration Group.

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