June 23 is EO Day, which is an annual opportunity to showcase the employee ownership (EO) sector in the UK. In this article we take a brief look at broad-based employee ownership in both private and public companies, exploring recent developments in the sector and considering what the future holds.

Increase in Employee Ownership Trust (EOT) transactions

The increase in successions into an employee ownership trust (EOT) continues apace.  

These are sales of at least a controlling interest in a trading company to an employee ownership trust. Employees of the trading company hold an indirect interest in the trading company as beneficiaries of the trust. 

The Financial Times reported in December 2022 that nearly 500 employee ownership trusts were created in the UK in the twelve months to September 2022. The growth of the model has continued strongly into the first half of 2023, if the press coverage of transitions into EOTs is anything to go by. The Employee Ownership Association publishes its annual data for the sector on EO Day which will show the state of play in June 2023.

We are also seeing follow-on sales into EOTs. This is where founders who sold a controlling interest in their business to an EOT but kept some of their shares, choose to sell further shares on to the EOT. The Guardian recently reported that Guy Singh-Watson, founder of vegetable box delivery company Riverford, who initially sold nearly three-quarters of his shares to an EOT in 2018, has now sold his remaining 23% stake to the EOT. 

Singh-Watson will not benefit from the specific EOT tax relief from capital gains tax on this further sale and said the transaction was motivated by the John Lewis example of employee ownership. 

The EOT “makes for a leaner and more motivated business and helps decision-making”, said Rob Haward, Managing Director of Riverford, pointing towards the positive employment outcomes in terms of retention and employee engagement which the EO model can support. 

In parallel, the UK government has announced that it will consult on the EOT tax regime later this year to ensure the regime is effectively incentivising the employee ownership business model.

Government review of direct all-employee share ownership plans

In June, the UK government launched a Call for Evidence into the two broad-based tax-favoured direct employee share plans, the Save-As-You-Earn scheme (SAYE) and the Share Incentive Plan (SIP). This follows the recent reviews into the Company Share Option Plan (CSOP) and the Enterprise Management Incentive Scheme, the other tax-favoured direct share ownership plans, which brought about relaxations to these plans’ rules to encourage their usage, and in relation to the CSOP, increased the companies eligible for the plan.

The SAYE and SIP are long-established plans in the UK and are mainly used by larger public companies. Both offer the ability for employees to invest in or receive company shares subject to annual caps of up to £6,000 for the SAYE plan and, for the SIP, £9,000 (plus potentially dividend reinvestment), where all the different types of awards are offered (which is uncommon).

The recently published “Share Schemes Evaluation – CSOP, SAYE and SIP” , an independent study commissioned by HMRC, found that the most common reasons for companies to implement these plans include creating a feeling of ownership, supporting retention and recruitment as well as improving staff morale. Most employees cited the ability to save as a primary factor in participation.

The Call for Evidence is a welcome indication of the importance the UK government places on promoting employee ownership in the UK. It should produce further evidence regarding the reasons for offering and participating in the plans, which will be useful particularly given that the take-up of SAYE and SIP schemes has plateaued in recent years, according to the Call for Evidence. It also provides an opportunity to demonstrate the employment and financial benefits of these plans and to determine whether changes should be made to ensure they continue to be attractive in the modern workplace.

Broad-based Employee ownership in PE-backed portfolio companies

An important recent development in the US is the implementation of broad-based employee ownership programmes in portfolio companies which are majority held by private-equity firms. A ground-breaking example of the success of this approach was KKR’s sale of C.H.I. Overhead Doors to Nucor Corp in June 2022. As part of the $3 billion-transaction, around 800 employees who had received equity at the time of KKR’s investment into the company in 2015, received an average pay-out of $175,000 each. 

The approach departs from the traditional approach to management equity plans in portfolio companies where the participant class is commonly restricted to the C-suite or a much more restricted class, than the broad-based all-employee equity participation at C.H.I. Overhead Doors.  

Similar initiatives are beginning to emerge in Europe. Last December, the private equity fund Ardian committed to expand shared ownership schemes in its portfolio companies. Both KKR and Ardian are partners of the US non-profit organisation Ownership Works, whose mission is to build employee wealth creation through shared ownership programmes, working with both private equity houses and corporates.

So how does the future look?

The future looks bright for the employee ownership sector. There is significant interest in employee ownership from a variety of stakeholders and all three main political parties in the UK are generally supportive of broad-based employee ownership. 

It will be important for the sector to continue to evidence the financial and employment benefits of employee ownership to ensure continuing support from stakeholders for the model in various forms. 

The growth of broad-based employee ownership in PE-held companies is also a very welcome development, particularly given the increasing number of take privates and the recent fall in UK stock market listings. Speaking with Ownership Works recently, they commented they are actively looking at how to take the shared ownership movement beyond the US and to work with European partners to enable these programmes to be successful in Europe.

How can A&M Tax help?

The Reward team at A&M Tax advises on EOT transactions and the implementation and operation of direct share ownership schemes. The team also has significant experience of implementing equity programmes in private equity-held companies. Please contact your A&M point of contact or Samantha Lenox or Louise Jenkins from our Reward & Employment Tax Solutions team. 

References

[1] https://www.ft.com/content/27e25bf9-e1a0-445d-aa90-339eacb0c686

[2] https://www.theguardian.com/business/2023/may/19/veg-box-riverford-staff-owned-founder-sells-stake-guy-singh-watson

[3] https://www.gov.uk/government/consultations/non-discretionary-tax-advantaged-share-schemes-call-for-evidence

[4] https://www.gov.uk/government/publications/share-schemes-evaluation

[5] https://www.businesswire.com/news/home/20220516005324/en/KKR-and-C.H.I.-Employees-Prove-%E2%80%98Ownership-Works%E2%80%99-With-Sale-of-C.H.I.-Overhead-Doors-to-Nucor

[6] https://www.ardian.com/press-releases/ardian-becomes-first-european-rooted-partner-support-ownership-works

[7] https://ownershipworks.org/