The Main Legal Documents Involved In Selling A Business To An Employee Ownership Trust

Implementing an Employee Ownership Trust (EOT) and facilitating a business owner’s sale to the trust involves several important legal documents. These are the main documents typically required as part of the process:

1. Trust Deed

• Purpose: The Trust Deed establishes the EOT and sets out its governing terms. It defines the purpose of the trust, which is to hold shares on behalf of the employees, and outlines the trustee’s powers and duties.
• Contents: This document specifies the trust’s objectives, the beneficiaries (typically all employees of the company), the appointment and roles of the trustees, and how the trust will operate.

2. Share Purchase Agreement (SPA)

• Purpose: The SPA formalises the sale of shares from the business owner to the EOT. It sets out the terms and conditions of the sale, including the number of shares being transferred, the sale price, and the payment structure.
• Contents: Key clauses typically include warranties and representations by the seller, payment terms (such as whether payment will be made in instalments), and any conditions precedent to completion.

3. Loan Agreement

• Purpose: If the EOT needs to borrow funds to finance the share purchase, a loan agreement is drawn up between the EOT and the company or an external lender.
• Contents: This document outlines the amount borrowed, interest rate, repayment schedule, and any security for the loan.

4. Declaration of Trust

• Purpose: The Declaration of Trust is used to confirm that the EOT holds the shares on behalf of the employees. It may be part of the Trust Deed or a separate document, and it sets out how shares are to be managed and held in trust.
• Contents: It specifies the rights attached to the shares, such as voting rights, and details how any distributions (e.g., dividends) will be handled for the benefit of employees.

5. Employee Communications and Employee Benefit Documentation

• Purpose: Documents that communicate the details of the EOT to the employees and outline the benefits they will receive. These could include employee handbooks or formal letters to employees explaining the trust structure and how it impacts them.
• Contents: Clear explanations of eligibility, rights as beneficiaries, and how the employee ownership structure aligns with company goals.

6. Board Resolutions

• Purpose: Board resolutions are required to formally approve the creation of the EOT, the share transfer, and related transactions.
• Contents: These resolutions may cover approval for the sale of shares, the establishment of the EOT, and authorization of individuals to sign documents on behalf of the company.

7. Articles of Association Amendment

• Purpose: The company’s Articles of Association may need to be amended to reflect the new shareholding structure and any specific governance requirements related to the EOT.
• Contents: These amendments could include provisions for employee involvement or voting rights for shares held by the EOT.

8. Trustee Appointment and Governance Documents

• Purpose: These documents formally appoint trustees and outline their roles and responsibilities in managing the EOT.
• Contents: They specify who the trustees are (e.g., company directors, independent trustees) and how decisions will be made, including any conflicts of interest policies.

9. Tax Clearance Documentation

• Purpose: To ensure that the sale qualifies for any tax benefits, such as relief from capital gains tax for the selling owner, it may be prudent to seek a clearance from HM Revenue & Customs (HMRC).
• Contents: A formal application for tax clearance under specific tax provisions to confirm that the sale meets the requirements for favourable tax treatment.

10. Employee Ownership Policy or Plan

• Purpose: An employee ownership policy or plan may be created to outline how employee participation and benefits are structured.
• Contents: It could include criteria for distributions from the trust, mechanisms for employee engagement, and the process for handling employee turnover.

Key Considerations for Implementation

• Legal and Financial Advice: Due to the complexity of setting up an EOT, legal and financial advice from professionals experienced in employee ownership structures is essential.
• HMRC Compliance: Ensuring compliance with HMRC regulations and the qualifying conditions for EOTs is crucial to benefit from associated tax advantages, such as capital gains tax relief and tax-free bonuses for employees.

Summary

The main legal documents involved in implementing an EOT and the sale of shares to it include the Trust Deed, Share Purchase Agreement, Loan Agreement, Declaration of Trust, and supporting documentation such as Board Resolutions and Employee Benefit Documentation. These documents ensure the smooth transfer of ownership and the proper governance of the trust, benefiting both the business owner and the employees.

How we can help

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point and in some cases where appropriate, a fixed fee appointment.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

Other useful articles

What is an Employee Ownership Trust?

Benefits of Employee Ownership Trusts for Business Succession

Tax Advantages of selling to an Employee Ownership Trust 

 

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.