Employee Benefit Trusts (EBTs)

Employee Benefit Trusts (EBTs)

What is an Employee Benefit Trust (EBT)?

An EBT is a discretionary trust established by a company to hold cash, shares or other assets for the benefit of the employees of the company or group of companies. It is constituted by a Trust Deed which sets out the purposes and powers of the trustees. Usually, the Trust Deed provides the trustees have discretion as to how the trust funds are to be applied. In exercising their discretion, they are required to act solely in the interests of the beneficiaries. The beneficiaries are usually all employees, former employees and their immediate families. Typically, in their decision making the trustees may take account of wishes expressed by the employing company.

Why use an EBTs?

EBTs are widely used by companies to attract and retain staff through the award or issue of shares. EBTs can provide a range of advantages in structuring employee incentive arrangements.

One key reason to use an EBT is if the employing company is a private business, its shares may be difficult to sell in the absence of a (public) market. Thus, an EBT can act as an internal "warehouse" to hedge against future obligations arising from the granting of awards or to serve as an internal marketplace.

This enables participants of the company's share schemes a real prospect of realising the value of their shares in due course without having to wait for any form of corporate exit event such as a sale of the company.

It also substantially enhances the perceived value of the shares by the participants, particularly where, as is common, share prices are determined at regular intervals by an independent valuer and communicated within the company.

Often, this internal market is funded by regular contributions from the employer out of its profits. The trustees are then able to buy shares from leavers and recycle them to joiners, promotees and so on (often, on the exercise of share options granted by the company), as appropriate.

The legal ownership of the fund is held outside the employing company, and participating employees, therefore, enjoy the comfort of knowing that the funds are safe and administered by independent professionals whose actions are governed solely by the interests of employees generally. Additionally, the fund is held independently and protected against claims by creditors in the event of failure of the company.

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