Employer Solutions Insights: From Private to Public – the value of an Employee Benefit Trust

In 1998, JTC created its Employee Benefit Trust (EBT) making all employees, from administrators to C-suite, direct shareholders in the firm.

EBTs are long-established and popular structures, used in conjunction with staff incentive schemes, which have many benefits for a business as a private company, through an exit event and as a listed entity.

This was a process that JTC underwent in 2018 with its listing on the London Stock Exchange and through the acquisition of RBC’s Employer Solutions business, we are able to provide this service for companies who wish to benefit from our years of collective experience and understanding.

EBTs can be flexible and tailored to the needs of the company and below is a short question and answer guide outlining some of the uses and advantages.

1. How can an EBT assist a private company overcome the hurdle of having no natural market for the holders of its shares?

In the event a shareholder wished to sell their shares and there was no natural buyer, the Trust could be funded to acquire those shares from the seller. Commonly, the Trust would be funded by a loan from the company (subject to any close company considerations).

In due course, if there becomes a buyer of some or all of the shares held in the Trust, the trustee could agree to sell shares to the buyer. The sale proceeds could then be used to repay the loan outstanding to the company, or be retained in the Trust to fund any future share acquisitions.

Alternatively, some or all of the shares acquired and held in the Trust, could be used in conjunction with the operation of a company share plan. We have added further details on this scenario below.

2. What role does an EBT typically play in the operation of a company share plan?

A company may wish to establish a share plan for employees, with awards typically subject to certain conditions, such as continued employment and / or the attainment of performance criteria. On the vesting or exercise of such awards, the relevant number of shares are transferred from the Trust to the employees.

Subject to funding, the Trust can repurchase any shares offered for sale by the employees, to cover taxes or otherwise. Any such shares repurchased, can be used to satisfy further awards or be sold to buyers.

If the awards are structured as options with an exercise price payable by the employees, the Trust can use such funds to purchase further shares, or make loan repayments to the company.

3. Can share awards be granted with a view to an exit event?

Awards granted under a company share plan, may be structured to only vest on an exit event such as a sale of the business or a listing. Again, sufficient shares can be acquired and held in the Trust, to satisfy such awards.

Immediately prior to the exit event, the relevant number of shares can be conditionally transferred to the employees, who then participate in the exit event themselves. Alternatively, the Trust participates in the exit event and distributes the value from the sale of the shares to the employees, based on their individual share awards (in both scenarios, subject to the payment of any applicable taxes, etc).

Where the exit event is not a listing and excess or unallocated shares are held in the Trust, these will likely be acquired for cash consideration by the buyer. Such cash may be used to repay any outstanding borrowing to the company, or be distributed to named employees at the request of the company.

If there is no ongoing use for the Trust, once the assets and liabilities of the Trust have been reduced to nil, it may then be terminated.

4. Where the exit event is a listing, what helpful role can the EBT continue to play?

In such circumstances, there will likely still be an ongoing use for the Trust, to acquire and hold shares to satisfy awards granted by the company as a publicly listed company (PLC). Indeed, any unallocated shares of the company held in the Trust whist it was private, may now have converted into shares in the PLC. These shares, plus any others acquired (typically in the market), can be used to satisfy awards granted to employees under the company’s new share plans as a PLC.

If the shares of the company are particularly illiquid and employees have difficulty in selling their vested shares in the market, the Trust can assist by becoming a buyer of such shares (subject to funding). Any such shares purchased, may be used to satisfy further awards in the future.

5. Can an EBT also play a role in any deferred compensation, post-vesting or nominee arrangements?

Due to regulatory reasons or otherwise, a percentage of certain employees’ annual bonus may be required to be made in shares of the company. The Trust can assist with this requirement, by facilitating either the sale of shares to employees, or holding the shares during the deferral period.

The Trust can also assist where there is a post-vesting holding period, or where shares may be subject to malus or clawback provisions.

To the extent required, the trustee may hold shares in a nominee capacity on behalf of employees, facilitating the onward payment of any dividends and the exercise of voting right, as required.

For a further consultation about the uses and benefits of EBTs, please contact Mark Le Saint directly.