Acting as an Independent Professional Trustee in an EOT Transaction
An Employee Ownership Trust (EOT) is commonly used as a succession or exit mechanism, whereby the owners of a trading company sell a controlling interest to a trust established for the benefit of the company’s employees. Where an independent professional trustee is appointed, the role is not administrative in nature. It requires active, informed and independent judgment as to whether the transaction is appropriate and in the best interests of the employee beneficiaries as a whole.
Why independent advice is critical
Before signing or approving the EOT transaction, an independent trustee should review the core transaction documents, including:
- the trust deed and trustee incorporation documents
- the sale and purchase agreement (SPA)
- the independent valuation report and supporting materials
- management accounts, financial forecasts and assumptions
- tax advice, clearances and HMRC correspondence (where applicable)
- governance arrangements and employee benefit structures
- any side letters or arrangements involving the sellers or company
The trustee should also consider whether the advice being provided is addressed to them without conflict, or whether separate independent legal advice is required.
The trustee’s role and responsibilities
The trustee is not merely approving a pre-agreed commercial arrangement between sellers and the company. Instead, the trustee must act independently and exclusively in the interests of the employee beneficiaries as a class.
In practice, this requires the trustee to:
- understand the commercial rationale and effect of the transaction
- obtain and consider appropriate professional advice
- interrogate key assumptions, including valuation and affordability
- ensure conflicts are properly identified, disclosed and managed
- maintain a clear and properly evidenced decision-making process
- ensure decisions are made on a fully informed basis
Key documents for review
Before signing or approving the EOT transaction, an independent trustee should review the core transaction documents, including:
- the trust deed and trustee incorporation documents
- the sale and purchase agreement (SPA)
- the independent valuation report and supporting materials
- management accounts, financial forecasts and assumptions
- tax advice, clearances and HMRC correspondence (where applicable)
- governance arrangements and employee benefit structures
- any side letters or arrangements involving the sellers or company
The trustee should also consider whether the advice being provided is addressed to them without conflict, or whether separate independent legal advice is required.
Common risk areas
Common issues for independent trustees include valuation risk, affordability of deferred consideration, conflicts involving the sellers, unclear trustee protections, inadequate decision-making records and insufficient understanding of the EOT tax and governance requirements. These risks can have significant legal, financial and reputational consequences for the trustee, the company, the sellers and the employee beneficiaries.
How we can assist
We advise independent professional trustees in relation to their duties and obligations in EOT transactions, including:
- reviewing proposed EOT structures and governance frameworks
- advising on trustee duties, powers and decision-making obligations
- reviewing trust documentation and transaction agreements
- advising on conflicts of interest and trustee protections
- reviewing completion mechanics, board resolutions and minutes
- supporting trustees through the approval and completion process
Independent trustees should take advice before accepting appointment, approving the transaction or signing the transaction documents. For further information or to discuss acting as an independent trustee in an EOT transaction, please get in touch.
