@ inspireeo. structures, governance & finance andrew harrison co-ownership solutions

@InspireEO

@InspireEO

Structures,Governance& finance

Andrew HarrisonCo-ownership Solutions

© Co-ownership Solutions - An Employee Ownership Association approved specialist advisor

Employee Ownership Structures, governance and funding


Definition of employee ownership

Company primarily run for the benefit of the employees as owners

Not run for a single shareholder or outside shareholders Wholly or majority owned by employees Either direct, indirect or hybrid ownership structure But, employees must have ownership and with it control


Two distinct parts to ownership

A stake in the business – actual share ownership. An culture of ownership – employee involvement in the

business


Employee ownership in the UK

c£30bn annual UK turnover – 4% of GDP.

Government call for ‘John Lewis’ economy backed up with tax reliefs.

28 ‘Nuttall Review’ recommendations.

Top 50 EO companies report:

4.6% yoy increase in sales;

25.5% yoy increase in EBITDA;

3.3% yoy increase in employee numbers;

4.5% yoy increase in productivity.

EOA aim 10% GDP by 2020.

EOA membership doubled since 2014.


Wide range of ownership structures, but essentially 3 scenarios:

Direct ownership – employees become individual shareholders of the company they work for (normally using tax advantaged schemes such as Share Incentive Plan (SIP).Indirect ownership – shares held collectively on behalf of employees through an Employee Benefit Trust (EBT) or Employee Ownership Trust (EOT).A hybrid of the above – indirect and direct.


DIRECT OWNERSHIP INDIRECT OWNERSHIP

Company Company

Employee trust


Trustees of Anyco Ltd Employee Trust

Board of Directors of Anyco Ltd

Senior management team of Anyco Ltd

Employees of Anyco Ltd

Anyco Ltd Employee

ownership council

Trustees in capacity as shareholder hold Board of Directors to account for their management of Anyco Ltd as an employee owned business.

Anyco Ltd Board of Directors are responsible for setting and delivering strategy of the business and ensuring performance targets.

Senior management team ensure that operational activities are completed and lead teams/departments of employees.

Employees elect fellow employees to any of:• Employee ownership council• Board of Directors of Anyco• Trustees of Anyco

Employee ownership council acts as a conduit between employees and the Anyco Board of Directors.


Employee reward

Employee Ownership Trust (EOT)‘new’ income tax exempt bonus.Up to £3600 annually per eligible employee.Lots of restrictions:

Equality requirement 12 months service

P&L chargeable.Levels out differences with dividends.

Direct ownershipDividends


Selling to employee ownership

Sale of shares in whole or in part. Immediate or phased Sale to:

An Employee Benefit Trust (EBT); a discretionary trust for all employees

An Employee Ownership Trust (EOT); a type of discretionary trust introduced by FA2014

A Share Incentive Plan (SIP); specific statutory trust as defined in Sch2 ITEPA2003

Employees directly.


Funding the sale to employee ownership

The Vendor The Company The Employees The Bank

Senior debt Co-op and Community Finance, C4C, eaga Trust

Mezzanine debt


Tax relief for owner

Exemption from capital gains tax: Must sell 50% + 1 share to EOT Proceeds from sale treated as neither ‘gain nor loss’ Limited participation rule 2/5 Connected persons and settlor excluded from benefit Benefits multiple vendors.

ER 10% rather than 18% or 28% Individuals, not company Must hold 5% Employee/director Held for at least 12 months


Company

EOT

Profit share – subject to profits. (CT relief)

Shares sold to EOT

Cash £ (deferred?)

Funding (no CT relief)

External finance?

Repayments


Selling to a Share Incentive Plan (SIP)

SIP is an ‘all employee’ share scheme. Purpose is to facilitate direct ownership Free Shares (£3600) Partnership Shares (£1800) Matching Shares (up to £1800) No PAYE or NIC at point of award/purchase. Company funding Trustee of SIP generates CT relief:

At date of award/purchase of Shares; or Up front if Trustee funded to acquire 10% within 12 months.


Developing an ownership culture

“Co-ownership is the starting point but its power only clicks in when combined with the full engagement of employees in the

‘co-creation’ of value – the CoCo companies.”

CoCo Companies. Work, Happiness and Employee Ownership – Richard Reeves 2007


Successful enterprises are ones in which employees are active ‘co-creators’ of value, rather than passive followers.

Clear leadership, decent management and humane policies can help but it is an uphill struggle to get people to go ‘the extra mile’ when the additional money generated flows into other hands.

People who are co-owners of an enterprise are inescapably invested in its success of failure!


Co-ownership is only half the story

It is when a structure of ownership is combined with a culture and systems of co-creation (consultation, information-sharing, employee forums) that organisational performance moves into a new gear.

Co-ownership and co-creation weave together to deliver a new way of doing business and a better way of doing work.


Gallup research identified 3 clear groups of employees:

Engaged Not engaged Actively disengaged.


Whether or not an employee was engaged depended upon their relationship with their immediate

supervisor/manager


Essentials of Great Management

1. Setting clear expectations so partners know what is expected of them.

2. Caring for partners as people.3. Partners doing what they do best and receiving praise and

recognition.4. Asking partners for their views and letting them know that their

opinions count.


Our approach - 4 key areas

Buy-in by business leaders/managers. Ensuring understanding of EO. Effective employee voice. Embracing employee engagement.

@InspireEO

Sean ElliotNetwork ROI

Direct Share Ownership at Network ROI

About Network ROI

• Network ROI provide high-quality managed IT support, IT Project, telephony and connectivity services.

• We work with organisations from the public, private and charitable sectors across a range of business sectors.

• Most of our clients are headquartered within the Central Belt of Scotland, but we support offices and clients further afield.

Why choose Employee Ownership?

Personal Goals

• Financial security

• Planned & controlled exit

• Phased journey to retirement

• More family & personal time

• Network ROI legacy

Business Goals

• Protect employees’ future

• Reward employees’ contribution

• Organic & sustainable growth

• Protect client relationships

• Protect service & culture

• Management succession

• Incentivise employees

Why Direct Share Ownership?

• Personal stake makes ownership feel more real – greater sense of

ownership

• Familiarity with share ownership – many people own shares in

companies

• Feels like an extension of personal savings plans or investments

• Tax efficient way for employees to invest in company & for

company to reward employees

• Growth in shareholding value directly linked to performance of the business

• Flexibility in terms of different ways employees can acquire shares

EO Structure

• Share Incentive Plan (SIP) combined with Employee Benefit Trust

(EBT)

• Initial free share agreement

• SIP agreements run annually

• Accumulation shares allocated on ‘buy 3, get 1 free’ basis

• Open share purchase offered annually to allow employees to

maximise HMRC limit

Employees get direct stakeTax efficient

Trust to hold controlling stakeTrust provides market for

shares

How is EO working for Network ROI?• All employees participate in SIP (from min to many at max per

mth)

• First dividend payments made in 2014

• More empowered and more informed workforce

• Employees have greater awareness of business objectives

• EO is a key differentiator when it comes to pitching for new

business

• EO has seen potential leaders emerge from within the business

• Employees seeing their individual shareholdings grow in value

In Conclusion• Employees and business owner working to the same, clear

business & financial objectives – understood by all involved

• Direct share ownership focuses attention on personal stake in

the business

• Helps encourage virtuous circle

Retention of key employees

Productivity

Working ethics & business culture

Achieving objectives for the benefit of all

If you’d like further discussion, you can e-mail me at

[email protected] ROIStobo House, Midlothian Innovation Centre,Roslin, EH25 9RE

www.networkroi.co.uk

@InspireEO

Neil WattFitwise

Neil Watt, Managing Director, Fitwise

Management Ltd

All your association needs, under one roof

What Comes to Mind When I Say Hybrid?

What Does Hybrid Ownership Mean?

• A mixture of both direct and indirect ownership• Both employees and a trust directly own shares

for the benefit of employees

Current Hybrid Ownership Position in Fitwise

• Total number of ordinary shares 50,000

• John and Maggie have transferred all of their remaining shares to the EBT

• 44,999 shares are held in the EBT on behalf of all Fitwise employees

• The remaining 5,001 are held in the Share Incentive Plan with 2,944 of these already purchased by employees

• Intention is to create an employee owned company. 80% shares held by EBT, 20% shares owned by employees. Max individual shareholding 5%

• Loan notes to John and Maggie will be issued by EBT for deferred consideration over 4/5 years

44999; 90%

2944; 6%2057; 4%

Shareholding Split

EBT Staff Puchased SIP Balance

What About Governance – Fitwise Trustee and EED Structure

Fitwise Trustee and EED Structure

Fitwise Management Trustees Ltd

Fitwise Employee Benefit Trust (EBT)Fitwise Employee Benefit Trust (EBT)

Fitwise Share Incentive Plan (SIP)

Employees

FMTL

FML Employee Benefit Trust

FML Share Incentive Plan

EBT and SIP are both ‘trusts’ and require ‘trustees’.Corporate Trustee is created to act as sole Trustee of both the EBT and SIP and manage their

affairs.Fitwise Management Trustees Ltd:

Controlled by a board of directors who act as Trustees.This board normally comprises 1 x employee elected trustee director, 1 x trustee director appointed by the Board of FML and 1 independent trustee director selected by other 2 trustee directors.Incorporated as Share Based Company with ‘special share’ held by employee representative to ensure FMTL is never controlled by board of FML Ltd.

USE OF CORPORATE TRUSTEE

Benefits of Hybrid Ownership• Best of both worlds – benefits of both direct and indirect models• Majority of shares can be held in the employee benefit trust to secure

long term employee ownership• Protects company from sale or takeover. Any future sale requires a

ballot of employees• As the majority shareholder the EBT can determine the outcome of all

major decisions• Fitwise senior management is held more accountable to FMTL and

employee shareholders• Employees are represented on Boards of both FML and FMTL• Employees feel engaged and have a real stake in the business• Employees have legal right to attend and vote at AGM’s, benefit from

share dividends and share in the future success of the business• Encourages we’re all in it together mentality

Are There Any Drawbacks?

• The fact that the EBT, as majority shareholder can outvote employees in every situation can be seen as undemocratic

All your association needs, under one roof

@InspireEO

Thank You

@InspireEO

@ inspireeo. structures, governance & finance andrew harrison co-ownership solutions

Documents

employee ownership trust

direct ownership employees

employee numbers4

indirect ownership shares

hybrid ownership structure

employee benefit trust

funding coownership

management of anyco