Tag Archives: employee benefit trust

Transitioning to Employee Ownership – the Legal Perspective

andersonstrathern
In January 2014, software developers Computer Application Services Ltd (CAS) moved from owner management to employee ownership.  Bruce Farquhar and Bruce Harvie, from the corporate team at lawyers Anderson Strathern, advised on the process.  Here partner, Bruce Farquhar gives his views on the transaction:

“The Corporate team at Anderson Strathern work mainly with the larger end of the SME market, and although we have advised a number of cooperatives, this is our first true “employee ownership” transition.  It was an excellent deal to be part of and I would say I’m now an enthusiastic advocate for the model.

“The transaction was quite straightforward, certainly no more complicated than any other business transfer transaction.   There were two main parties to the deal, the former owners as the vendors and the employees of CASLtd as the buyers.  It was in no way an adversarial process – indeed it was very collaborative with all parties wanting what was in the best long-term interest of the company.  We also involved an accountancy firm, Johnston Carmichael, which was able to give specialist advice on the tax implications for the parties.

“Like most employee owned firms, the majority of the shareholding is held in an Employee Benefit Trust.  This Trust retains the shares for the long term and provides stability to the company.  There is also a portion of shares available to employees as options.  In this way, employees are able to see their value in the business grow as the company prospers.

“The chair and chief executive both invested in the business and this meant there was no need to source any external finance for the deal. The intention is that both chair and chief executive will sell their shares back to the employee trust in the future.

“The sale to employees was not the first intention of the vendors. They had been pursuing a trade sale which had fallen through. However, the employee ownership option provided a satisfactory exit for them as owners, and was well received by the employees of CAS.

“As an adviser, it is a model I see fitting well with the aspirations of a number of business owners. Many entrepreneurs are reluctant to see their firm in the hands of a competitor.  The grueling process of preparing a business for a trade sale can be uncomfortable for a seller.

“A sale to employees can be a much easier process. An additional attraction for the owner is that they are able to control the pace of the transaction, and can influence their role in the business going forward.  The former owners of CAS had decided they wanted to exit at the point of sale.  Many owners would prefer to remain involved in some way, perhaps in a non-executive role.  The collegiate nature of an employee ownership transaction enables the vendor to do that.

“The benefits for employees are clear.  There is continuity of employment, they have a stake in their business, and more say in how that business is run.

“We’re delighted that we are now working with another successful Scottish business making the move to employee ownership. As awareness grows, I’m confident there will be many more following suit.”

You can learn more about  CAS Ltd’s transition to employee ownership at an event hosted by CDS and CAS Ltd in Edinburgh on Thursday 3 September.

For more information or to register go to: http://bit.ly/1Vh9aUy

Tayside textiles firm begins journey to employee ownership

Welcome to our first “guest blog”. This one’s from senior Scottish businessman Professor Nick Kuenssberg, chairman of Fife-based technical textiles firm Scott & Fyfe which only last month embarked on its journey to employee ownership. Over the next year we’ll be hearing regularly from a range of co-operative voices.

We hope to make this blog a must-read not only for the Scottish co-operative sector but also the wider Scottish business community. Thanks Nick for kicking our guest blog spot off in style.

Sarah Deas, Chief Executive, Co-operative Development Scotland.

 

 

 Nick Kuenssberg

Having launched Scott & Fyfe Limited – the Tayport-based technical textiles business – on the journey towards becoming an employee owned company, I thought it helpful to explain not only the context but also the reasoning behind its introduction and the special attributes behind our particular employee ownership model.

Context: Scott & Fyfe, founded in 1864, is a traditional industrial textiles company, a survivor of the Tayside jute industry that reinvented itself successfully in the 1960s when jute was replaced by polypropylene. There had been significant restructuring of both the business and the management following the 2008 international crisis and the 2009 retiral of executive chairman, Hamish Tough.  The existing profit share scheme was increased from five per cent of pre tax profit to ten per cent, distributed on a per head basis. In addition, an annual incentive scheme for management and a three-year rolling incentive scheme for out-performance by senior management were introduced in 2011. The company was stabilised and a new innovation-led strategy was developed together with a flatter organisational structure and greater market-facing activity in January 2012.

Decision justification: Hamish Tough and his sons Richard and David, both current executive directors, represent the family owners. In mid 2011, while discussing the future needs of the company and likely succession plans, they hit upon employee ownership as a potential solution. Following discussion within the family and with others including employee ownership expert David Erdal, they concluded that the long term sustainability of the company, the health of the Tayport community and the interests of its customers and employees could perhaps be well served through an employee ownership model.  There followed long conversations, support from Co-operative Development Scotland and six months consultancy from Baxi, all carried out in complete secrecy in case the project did not come to fruition.

Shareholders and board committed to the concept in mid August and the project was launched to all 100 employees in a lengthy but successful meeting in mid September of this year, when all received a “Business Class” boarding pass for the journey.

Scott & Fyfe model: The particular structure adopted by Scott & Fyfe is mixed i.e. ordinary shares will be owned by an Employee Benefit Trust and directly by the staff. This will be achieved as follows: the family will sell all their shares to the Employee Benefit Trust which will always own an absolute majority of the ordinary shares. Richard and David Tough will reinvest the bulk of the proceeds (in reality the totality of their proceeds net of tax) in redeemable preference capital which will be paid out over up to 16 years.

Only current employees and the Employee Benefits Trust will be ordinary shareholders in the company. All employees will be shareholders and will have the opportunity of building a cumulative equity stake via a number of routes, these to be sold on departure, retiral or death:

  • An initial one-off award of free shares through a Share Incentive Plan (SIP) to create personal individual ownership and ensure the right to participate in the AGM;
  • The annual profit share will be split 50:50 between ordinary shares (warehoused by the SIP to mitigate NIC, PAYE and capital gains tax liabilities) and cash (subject to NIC and PAYE);
  • The potential annual purchase of partnership shares from the SIP through the payroll up to the legal maximum of £1,500;
  • The issue of free and matching shares in line with the purchase of partnership shares, the multiple being determined by the company’s performance the previous year; and
  • Management performance-related share option EMI schemes, whereby 50 per cent of the award vesting in line with the criteria (personal and company-related) will be issued as ordinary shares, the balance in cash subject to NIC and PAYE.

Corporate governance: In addition to the more obvious benefits of ownership for the workforce:

  • Employees will elect one employee director (maximum 3 terms of 2 years);
  • Employees will be represented on the ten strong employee forum;
  • The Employee Benefit Trust will be managed by a careful balance of seven trustees including two employee-elected and one independent trustee, and
  • The long-term beneficiaries of the EBT in the event of the sale or liquidation of the company are any outstanding pension fund deficit and the Tayport community.

In this way the company will be managed by the board of directors (all of whom will be subject to re-election every two years) in the interest of current and future employees and the community. The incorporation of a requirement for special resolutions in respect of major decisions means that corporate governance will be more challenging for the directors than under previous family ownership.

Legacy: This dramatic move by the Tough family is to be welcomed; it will help to underwrite an exciting future for the company and its stakeholders including its customers, its employees and through them the local community. This is a wonderful legacy for Tayport.

Website: The employees have welcomed the opportunity and the initial workshops have generated a positive current of interest. As part of the education and training the company has established a comprehensive website (www.tayportworks.com) that is being constantly updated and is available to all including third parties.

Progress: There are two rounds of training workshops underway and the legal documentation is virtually complete so that there should be no obstacle to completion before the end of the current calendar (and financial) year.

This is genuinely a new dawn for everyone at Scott & Fyfe and it’s up to all to seize the opportunity. The board believes that the combination of employee involvement and employee ownership will contribute to the future long term success of the company.

Richard Tough, David Tough, John Lupton from Scott & Fyfe.

 

Members of Scott & Fyfe’s ‘NOW’ team – Michelle Quadrelli, Business Manager, Kevin White, Machine Operator, Alison Bond, Business Manger and Peter Thomson, Project Technician (knitting) – assessing new product ideas.

 

 

 

 

Stuart McLaren, Assistant Technician threading a double needlebed machine at Scott & Fyfe.

 

 

 

 

Bob Caird, Machine Operator Stich Bonding and Loop Fabrics Department at Scott & Fyfe.

 

 

 

 

David Nicoll, Development Technician assessing new weave constructions on Scott & Fyfe’s flat weaving looms.

 

 

 

 

David Walker, Machine Operator Stich Bonding and Loop Fabrics Department at Scott & Fyfe.

 

 

 

 

 

 

 

 

Co-operative Development Scotland is a Scottish Enterprise subsidiary, established to help companies grow by setting up consortium, employee-owned and community businesses. It works in partnership with Highlands and Islands Enterprise