UK: How does management continue to effectively run a business when it is owned by employees?
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A look at the main structuring and decision-making processes that are in place for a successful employee-owned business.
After a transition to employee ownership, a commercial company will continue to be managed by the directors and its senior management. (It may be necessary to recruit new managers before the change if the outgoing owner no longer wants to be with the company, or he may stay for a short time to help with the transition or even continue as before but with more responsibility to employees). Managers need to commit to greater transparency and will hopefully get more commitment from employees.
Employee engagement is not a given. The transition brings about a change in the way the business operates as employees will have more say in the future of the business and some key decisions may be subject to their approval in the future. This is a cultural transition that concerns all employees and must be carefully planned so that it works at the same time as the legal transition takes place.
In a company owned by an employee shareholding trust (EOT) (to learn more about the different structures available for employee shareholding, see here), there are usually one or two employees (depending on the size of the trading company). ) selected to sit as a Trustee on the Board of Directors of the Trustee Company (alongside a Trustee appointed from management and, often, an independent Trustee). The role of the trustees, whatever their number and wherever they are appointed, is to ensure that the commercial company owned by EOT is managed for the benefit of the beneficiaries (in this case, the employees). When setting up the structure, there will be a trust deed which, together with the articles of association of the trust company itself and the underlying trading company owned by EOT, will govern the responsibilities of the EOT. The directors of the commercial company owned by EOT themselves will need to obtain the consent or approval of the EOT (as a shareholder) and sometimes the employees themselves, for certain decisions or actions.
Here are some examples of the type of decisions that may require EOT or employee consent:
- any resolution to liquidate or dissolve the trading company or any subsidiary of the trading company;
- any substantial change in the nature of the business of the trading company and its subsidiaries (if any) taken as a whole;
- any modification of its statutes;
- declare or pay a dividend or make a distribution in the form of a bonus to employees;
- any sale of the trading company and / or any subsidiaries of the trading company;
- the provisions of a remuneration policy;
- appointment of trustees for the EOT.
Where an exiting owner owes deferred consideration for the sale of shares to the EOT, the constating documents will also include restrictions on those shares, meaning that the exiting owner may also need to consent, until such time as ‘they are paid in full. (or up to a certain threshold). A preferred share is often issued to the outgoing owner to give him increased voting rights in order to help him in these protections.
If there is a sufficient number of employees, an employee council can be set up, which will consult with management on various matters as defined in the articles of association. When the number of employees is small, the employees will generally have the right to be consulted as a whole, with a minimum threshold (eg 75%) of consent required to carry out certain actions.
Decisions requiring employee consent and those retained by management are left to the discretion of the trading company when setting up employee share ownership documentation.
When a direct ownership structure is used, rather than an EOT, the employees will be direct shareholders and will have all the participation and voting rights conferred on those shares in the articles of association of the company. The statutory duty of directors to make decisions that benefit the company, and all of its members, will therefore include the employees who are then shareholders and the directors will be directly responsible to them as with any other shareholder.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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