Who runs an employee-owned company? Some governance observations.

This blog post was co-authored by Nigel Watson (Partner) and Zuzana Choteborska (Trainee Solicitor). 

Exploring EOT governance

Employee Ownership Trusts (EOTs) have grown in popularity in recent years as business owners become more aware of the many benefits that an EOT structure can provide. Introduced just over a decade ago, EOTs provide a structured and tax-efficient means by which ownership of a business can be transferred to a trust for the benefit of its employees.

Where once the usual route for a business owner wishing to “exit” was a trade sale to a third-party buyer, an EOT transaction arguably gives owners a more enduring exit, where the concept of “legacy” is a key driver for embracing the tenets of EOT ownership.

Necessarily, however, EOT ownership creates a different framework for running and operating a business and making commercial decisions. The power to make and influence decisions is often divided among various stakeholders. Old habits die hard, and often there is a delicate balance between the former business owner wanting to retain influence over the newly owned EOT business, which should not raise any issues, and wanting more overt control over decision-making, which is potentially disallowed under the EOT tax rules.

All of which begs the question, legally and operationally, who runs the company after it has been sold to an EOT? 

First, some more context.

What is an EOT?

An EOT is a specific type of employee benefit trust that owns most of the shares in a trading company which is then managed on behalf of its employees. Transferring ownership to an EOT attracts certain tax advantages, both for the selling shareholders in the form of reliefs from capital gains tax and for employees in the form of tax-free bonuses. To qualify for these tax advantages and to ensure that they are not lost once the EOT is up and running, an EOT must satisfy the following criteria:

• The trading requirement.
• The controlling interest requirement.
• The limited participation requirement.
• The equality requirement.
• The trustee UK residence requirement.
• The trustee independence requirement.

The residency and independence requirements were recently introduced by the Finance Act 2025 with the objective of preventing unwarranted tax benefits and supporting UK employee ownership as a viable and sustainable business model. The above criteria need to be satisfied at the time the trading company is acquired by the EOT, and the claimed relief can be revoked if the EOT ceases to meet the listed requirements within four tax years following acquisition.  

Who runs the trading company?

From the outset, shareholders need to decide whether they want to sell most or all of their shares to the EOT. The level of shareholding retained makes a difference to the future governance of the trading company. If a selling shareholder retains a minority stake, they usually expect some sort of involvement in the future running of the business, although they have less control. 

The involvement of a minority shareholder may be influenced by various factors. For example, whether there are any outstanding debts due to them from the EOT in the form of deferred consideration for the purchase of their shares in the trading company. 

Capturing that ongoing involvement, without jeopardising the EOT tax position, is a delicate patchwork of influence formalised through various overlapping legal checks and balances. 

Minority shareholders are just one stakeholder with an interest in how the business is run. Other stakeholders include the EOT trustees and the directors of the trading company as well as its employees, and their respective vested interests need to be harmonised through the legal architecture that underpins the operation of the EOT.

The EOT trustee

For example, the EOT trustee (normally structured as a trustee company with a board of directors) is bound by the terms of the trust deed. But whilst the power to appoint and remove individual trustees or a corporate trustee is contained within the trust deed, the appointment and removal of the underlying trustee director is set out in the articles of the trustee company.

This means that where there are different types of EOT trustee directors, e.g. employee trustee directors, founder trustee directors and independent trustee directors, there is an extra layer of governance to consider, both before and after the articles have been adopted.

The directors

Post-EOT, the board of directors of the trading company are responsible for day-to-day operational matters. A tension can then arise between the directors, who have a fiduciary duty to promote the success of the company, maximise growth and ensure financial stability, and the EOT trustee, who has obligations to the selling shareholders and must consider the interests of its beneficiaries, namely the employees.

The employees

Employee ownership does not equate to direct managerial control of the trading company. Instead, the employees have agency through the EOT, which acts as the vehicle for making decisions on behalf of the interests of employees. To better inform the EOT’s decision-making process, an employee council is often established to provide a channel of communication between employees and directors and between employees and the trustees of the EOT. This structure ensures that employees’ views are considered when certain decisions are made or when certain matters are discussed.

Final thoughts

The employee ownership framework represents a distinctive model for business governance and corporate succession. Post-transfer, the question of who governs the trading company is not merely theoretical but central to the practical operation of the EOT-owned business. The statutory requirements underpinning the EOT regime demand ongoing compliance to safeguard and benefit from the associated tax advantages, leading to the need to carefully manage the balance of influence and independence of the stakeholders through robust legal architecture. Ultimately, the success of an EOT lies not merely in its establishment, but in its ongoing governance and the ability to harmonise stakeholder interests. 

For further information or advice on EOTs, please contact Nigel Watson

“Governance and leadership are the yin and the yang of successful organisations. If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference.” – Mark Goyder (Director of Tomorrow’s Company)