Employee Benefit Trusts: Still a popular structure in Asia
Employee Benefit Trusts (EBTs) are used to attract, retain, reward and incentivise employees with the expectation that this will also increase profitability of the company. EBTs can be set up at any time but are frequently established before a listing or funding event.
Most EBTs are what can be described as “discretionary trusts” in the sense that no beneficiary has any absolute entitlement at the outset. The potential beneficiaries are typically employees (current, future and previous) of a company or group of companies but in certain cases can also include their families and dependants. An EBT can be for employees at large or restricted to senior management. Alternatively there can be different EBTs for different groups of employees. Care needs to be taken that the EBT contemplates future events which may happen to a company such as a takeover, a merger or a change of domicile.
The Trustee of the EBT will typically be a professional trust company or, where the company has sufficient resources, a trustee set up for the purpose of acting as the trustee (a private trust company or “PTC”). The BVI, Hong Kong and the Cayman Islands are three of the most popular jurisdictions.
The EBT would be established with cash or shares from the company itself or from the founder(s). Where share options are part of the EBT arrangements the company will need to ensure that it has sufficient unissued shares at the time when any options are exercised. From an employee’s perspective it is preferable that the trust is ring-fenced from the company’s creditors – particularly if the EBT contains cash. However this is not always the case!
Typically, the company – or its remuneration committee- will determine which employees become entitled to what and in what circumstances. In most cases, awards are subject to certain conditions – usually some form of time period during which the specific employee must remain with the group, together with specified performance targets. It needs to be set out who can control the votes in respect of any shares held by the trustee and for whose benefit any dividends are held.
Once awards are vested, the relevant beneficiaries could become entitled to receive shares in the company, could be granted share options capable of being exercised (and therefore receive shares) or could receive cash. Each beneficiary’s tax and reporting obligations need to be considered. It is also important to note that vested awards do form part of the employee’s assets in the event of death, divorce or bankruptcy. No two structures are the same so appropriate advice should be taken.
This article was written by Richard Grasby. For more information please contact Richard on +852 2531 3408 or at email@example.com.
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