Employee ownership 

Employee ownership trusts (EOTs) have been hitting headlines recently and are an increasingly popular succession model for business owners.  

In this instalment of our ESG in the boardroom series, we highlight some of the key ways in which the transition to an EOT ownership model can help a business succeed while supporting an environmental, social and governance (ESG) agenda.  

What is an EOT? 

At its core, an EOT is a special type of discretionary trust which is established by a trading company (or the parent company of a trading group), for the purpose of acquiring a controlling interest in that company.  

The trustee of the EOT holds the shares for the benefit of the employees of the company and must act in the best interests of the employees. While the selling shareholders can benefit from an exemption from capital gains tax if certain statutory conditions are met, the tax relief is typically only one of  many reasons why so many founders are choosing an EOT model. 

Data from the Employee Ownership Association confirms that employee-owned businesses are between 8 to 12% more productive and invest more in their people, innovation and communities than other businesses.  

Preservation of legacy 

A sale to an EOT can offer the founders a way to exit their business while preserving its  culture and values. 

In our experience, businesses that transition to employee ownership are often socially conscious in a number of other ways. In 2018, we advised one of our long-standing clients, the B-Corp certified travel company Sawday’s Group, on its transition to employee / charity ownership in aproject that established a unique underlying shareholder structure. This allows the charitable trust – which now owns 24% of the company - to use its share of profits to address the impact of tourism on climate change, and allows the EOT to reward and empower its employees.  

Protecting the workforce 

Some businesses, like T & N Gilmartin, have a history grounded in their local community. A sale to a trade buyer could lead to relocation or job losses, and so a sale to an EOT is an alternative way to empower employees: securing their jobs and keeping their employer local.   

Even though an EOT model doesn’t always  employ direct ownership ( meaning the employees do not always hold shares in their own names), we have nevertheless seen how employee ownership can lead to employee empowerment and better working practices. 

In one instance, our employment team supported an employee-owned client through a disciplinary action against one of its directors. The whistleblower disclosed that they only felt comfortable coming forward after employee ownership was put in place because they felt confident that they would now be taken seriously.  

Engaging employees 

A key feature of the EOT model is that the trustee of the EOT must act in the best interests of all of the employees.  In practice, this is typically achieved by an employee being appointed, by the employees, as a trustee director of the EOT.  

There are several other ways in which employees,  can be involved in the decision-making process. These include the appointment of an employee representative, or even an employee council, elected by the employees as a whole to make representations to the EOT trustee.  In fact, the terms of the EOT may expressly require the consent of the employee representative or employee council before strategic decisions can be made.      

Balancing growth strategies with stakeholder accountability 

An EOT-owned company looking to expand - by either acquiring a complementary business or seeking outside investment - must often secure the consent of the EOT trustee and, in some cases, employee representatives or an employee council. While these considerations can lengthen the deal timeline, they ensure the purchase aligns with the company’s established culture and social values, in turn protecting its long-term environmental and community commitments.   

This mechanism of stakeholder accountability dovetails with the “E” and “S” objectives: expansion plans can be analysed not just for financial returns, but also for their potential environmental or social impact on the workforce, local area and communities. 

Rewarding employees fairly 

The EOT model has a key social benefit:  rewarding all employees who have worked towards its success on an equal basis, rather than earnings staying primarily with a small group of shareholders.  

To qualify as an EOT, the terms of the trust deed must provide that the trust property can only be distributed to all employees on the same terms (other than limited differentiation based on hours worked, remuneration and length of service under the current rules).   

An EOT-owned company can use its profits to pay annual tax-free bonuses (of up to £3,600 under the current rules) to employees.  The principle of equality applies to the payment of these bonuses (again subject to limited differentiation), meaning that rewards are distributed more broadly across the workforce.      

Although employees don’t  individually own shares through an EOT, an employee-owned company can still establish share incentive arrangements for key contributors or even for all employees – this further reinforces the principle of fairly rewarding collective and individual contributions. 

Embedding stronger governance 

The EOT model encourages good governance in a number of ways: 

In our view, the EOT model directly supports ESG objectives by placing employees at the heart of both decision-making and financial reward. This ensures a fairer distribution of profits while also fostering a culture of accountable, transparent governance.  

Through mechanisms like tax-free bonuses and inclusive trustee arrangements, EOT ownership can create an environment where business growth and social responsibility successfully co-exist, preserving a company’s ethos and values in the process.  

Ultimately, it exemplifies how an ownership structure can deliver practical benefits to employees, the local community, and the wider business ecosystem, all firmly aligned with ESG principles. 

Discover the rest of the articles in our ESG in the boardroom series, helping you to drive sustainable growth and make a positive impact, visit our In Focus page.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.