An ESOP trust is an employee-share-ownership trust and is a mechanism that allows employees to buy or own shares in the private company. The ESOP trust is entitled to provide input into the business dealings of the company and carries all the benefits of other shareholders.
How does an ESOP trust work? The company sets up the ESOP trust with the assistance of experience legal experts and then transfers the allocated shares to the trust. The trust is then managed and run by a panel of trustees who are nominated from and by the representatives of the company and other employees. The trustees would be responsible for the administration of the trust and making decisions on behalf of the trust. The employees who form part of the ESOP trust are beneficiaries of the trust and may thus receive dividends and other share-based incentives.
The ESOP trust is an excellent vehicle to give loyal employees of the company the deserved recognition for their input in the growth and prosperity of the company. An ESOP trust is also a very effective tool as part of a staff retention strategy – by retaining employees who would be loyal to the company, as they effectively own shares in that company.
An unintended win-win effect of an ESOP trust is that the employees and companies are rewarded for their performance. Employees, on one hand, would naturally work harder and put more effort into their work when they have a reward over and above their normal remuneration. The company, on the other hand, is also rewarded through an alignment of employee interests with those of the company goals, vision and mission.
The relevance of an ESOP trust, in cases where a private company is restructured for B-BBEE ownership transactions, is pivotal. The ESOP trust will ensure that the objective of a B-BBEE ownership restructuring transaction is carried through by benefiting employees who would generally not be benefiting from the company they work for, other than their wages or salaries.
There is better news – the ESOP trust is evergreen. This means that the ESOP trust is not dependent or attached to employees who resign from the company. New employees will be the new beneficiaries and resigning employees will cease to be beneficiaries.
The above information is a simplification of the benefits of an ESOP trust and it must be noted that an ESOP trust is not a case of one-size-fits-all, as each company and its employees are unique, with specific challenges and goals. If you are interested in finding out more about ESOP trusts and how to offer your key employees options or shares in your company, contact the corporate and commercial law team at Barnard today.
By Dirk Swanepoel | Senior Associate
