Pre-IPO Employee Benefit Trusts: Advantages of Structuring in Guernsey and Jersey

Market uncertainty due to the Global Pandemic has not held back the burgeoning global IPO market, which surged to a five year high in 2021 both in terms of funds raised and in the number of deals.

Careful pre-IPO planning is vital for those companies wanting to list (“Listco”). Employers are acutely aware of the important role that their top achieving employees play in ensuring a successful IPO – and in candidate-driven job markets, employers who fail to prioritise retention efforts during the pre-IPO planning phase risk seeing top performers explore better-rewarded opportunities elsewhere. A frequently-used way to secure loyalty and commitment is through a well-structured employee incentive scheme, and the employee benefit trust (“EBT”) has become one of the preferred pre- IPO structures to achieve this objective.

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Purpose and typical structure of EBT

Employers use EBTs to attract, retain and reward their most valued personnel and EBTs can form an essential part of an employee’s compensation package. High performing staff members are given part ownership in the company through a share award scheme, aligning their interests with that of the shareholders. Companies in turn benefit from a more committed and motivated workforce with a desire for the company to succeed and do well.

Before the Listco offers its shares to the public, the company’s founders will put aside a number of shares (typically 5-10%) as a reward for the employees. These shares are then transferred into the EBT which is typically established as a discretionary trust with an underlying holding company through which the shares in the Listco are held. EBTs are very flexible and can be made bespoke through a set of rules dictated by the Listco. The beneficiaries are the eligible employees, the settlor is the company (which is excluded from benefit) and a professional fiduciary is appointed as trustee who is required to act in the best interests of the employees as beneficiaries of the EBT.

Companies regularly use restricted share units, restricted shares or options as employee awards, or a combination thereof. However, the type of incentive offered is typically driven by the company’s objectives and business plan, as well as the existing and anticipated share structure of the company, the number of intended beneficiaries and their locations together with any other relevant legal and tax issues.

How do EBTs work?

It is by no means easy for shareholders to forego up to 10% of the value of their company, especially when one considers the many years of sacrifice and effort that went into building the business up to the point of an IPO. Employers are therefore hesitant to immediately surrender all of the rights and interests attached to those shares, which is why EBTs have become such a popular tool.

EBTs are flexible enough to allow the company to delay the transfer of full ownership and control over the shares to the employees according to a vesting schedule which typically spans a period of 5-10 years. By doing so, employees are locked in for the duration of the IPO without having rights to income, capital or voting until such time as the shares actually vest. Employers also have the freedom to choose which employees are allowed to participate in the scheme, set the performance criteria which employees must satisfy and determine under what circumstances shares lapse or are forfeited.

Companies are also at liberty to specify exactly how they want the scheme to be operated and often appoint members of their board (normally from finance and human resources departments) as scheme administrators to assist the trustees with the management of the scheme.

Benefits of an EBT

EBTs can be used for a truly global workforce irrespective of the employees’ location - a point particularly relevant in the digital sector, or where parts of the workforce are operating remotely.

In addition, assets held in an EBT are protected from creditor claims which means that where the operating company owes third parties money or is declared bankrupt, the EBT’s assets are not available to satisfy the company’s debts. The Company can avoid potential conflicts of interest by appointing an independent person (usually a professional fiduciary) to act as trustee of the EBT which provides a further assurance to employees that their awards are being properly managed.

Where employees forfeit their shares, for example, by leaving before the end of the vesting period or by breaching the terms of eligibility, the EBT can act as an internal market to acquire those shares and reuse them for future incentives.

Finally, over the past 12-24 months, there has been a gradual shift towards electronic platforms for the administration of trusts, particularly EBTs which can be fairly beneficial to employees. These platforms are set up so that employees are directly engaged through a dedicated website or smartphone application. Circulars on legislative updates and trustees decisions on behalf of the EBT are instantly communicated to participating employees. Greater transparency on the management of the EBT are thereby provided and the administration thereof are also streamlined electronically.

Where to establish an EBT

Companies have set up their EBTs in Guernsey and Jersey over the past few years due to several factors, including that the islands are English-speaking, located in the same time zone as London with close links to the UK and Europe, are politically-stable jurisdictions with independent legal traditions dating back hundreds of years, and well-established and mature trust industries with experienced trust administrators for the proper management of EBTs.

In addition to and in recent times, the islands have taken the lead in international efforts to combat issues of money laundering and tax evasion keeping both Guernsey and Jersey off the European Union’s lists of non-compliant jurisdictions. With a top tier corporate banking system, Guernsey and Jersey provide a full suite of banking services to trading companies, holding and investment companies, funds and trusts including EBTs.

While it is important to take tax advice before establishing an offshore trust, the islands offer clear tax advantages where the EBT is properly structured.

Conclusion

Companies are encouraged to prioritise employee retention strategies during pre-IPO planning as this significantly contributes to a successful IPO. As set out more fully above, EBTs are one of the most widely used employee incentive schemes due to their flexibility, tax efficiency, confidentiality and the ability for companies to retain a measure of control. It is therefore a valuable tool to reward high performing staff members during a very stressful and demanding time in the company’s history.

Our Private Capital & Trusts team comprises experienced lawyers based in Guernsey, Jersey, Cayman and BVI who routinely advise on EBT structuring and ongoing issues as and when needed, many of whom have prior experience working in-house with trust companies and family offices and with onshore law firms.


GUERNSEY
Rupert MorrisPartnerT +44 (0) 1481 748 936rupert.morris@walkersglobal.com
Rajah AbusrewilGroup Partner*T +44 (0) 1481 748 945rajah.abusrewil@walkersglobal.com
Nitrisha DoorasamyAssociateT +44 (0) 1481 748 921nitrisha.doorasamy@walkersglobal.com
Kathryn MackenAssociateT +44 (0) 1481 748 934kathryn.macken@walkersglobal.com
Marcel Treurnicht AssociateT +44 (0) 1481 758 952marcel.treurnicht@walkersglobal.com

JERSEY
Robert DobbynPartnerT +44 (0) 1534 700 773robert.dobbyn@walkersglobal.com
Sevyn KalsiSenior CounselT +44 (0) 1534 700 775sevyn.kalsi@walkersglobal.com
Carla PlaterAssociateT +44 (0) 1534 700 872carla.plater@walkersglobal.com

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