Between ESOPs, EOTs and Mondragon cooperatives: the institutional design of Slovenia's employee ownership cooperative act Open Access

In its modern history, Slovenia has approached employee ownership on three separate occasions. First, through self-management in Yugoslavia, where workers' control and social ownership have been mandated by the socialist party. Second, during the privatization years, many workers became shareholders of newly privatized companies. This arrangement soon faded, often due to the concentration of ownership through managerial buyouts, which undermined broad-based employee participation and led to a shift toward traditional ownership structures (Simoneti et al., 2001). Following that development, Slovenia sought alternative approaches to promote employee ownership. In 2008, the Employee Participation in Profit Sharing Act was adopted, aiming to encourage employee shareholding plans. Despite this legislative effort, the Act proved largely ineffective in fostering employee ownership, with reports indicating that only one business adopted an employee shareholding plan under the scheme (European Commission, 2025).

Currently, Slovenia hosts between 15 and 20 enterprises that have established employee ownership programs. Nevertheless, these initiatives are predominantly characterized as ad hoc arrangements developed by particularly committed business owners, rather than being implemented within the parameters of formal legislative frameworks. This ineffectiveness can be attributed to several factors, including insufficient financial incentives for companies, a lack of a clear regulatory framework, administrative barriers to implementation and a lack of awareness or support among both employers and employees (Gonza and Juri, 2025). Compared to countries such as the United Kingdom or the United States, where employee ownership models like ESOPs and Employee Ownership Trusts (EOTs) benefit from robust tax advantages and clearer regulatory frameworks, Slovenia's approach lacked the necessary conditions to drive widespread adoption.

In October 2025, the Slovenian government passed the Employee Ownership Cooperative Act (EOCA) ^[1]. Following a sequence of ESOP-type legislative initiatives, including the US Employee Stock Ownership Plan (ESOP) legislation in 1974 (Snyder, 2003), the UK’s Employee Ownership Trust (EOT) legislation in 2014 (Pendleton and Robinson, 2025), and Canadian EOT legislation in 2024 (Hemingway and Pek, 2024), the EOCA provides the first comprehensive legislative framework for a Slovenian ESOP ^[2]. The US, the UK, and Canada's models are all based on a trust as a special legal vehicle, but since a trust does not exist in the Slovenian legal system (Kramberger Škerl and Vlahek, 2020), the model conceptualization required a reconsideration of structural design, which was first described by David Ellerman, Tej Gonza and Gregor Berkopec in 2022. To our knowledge, this was the first adoption of the ESOP-like mechanism in a Civil Law system (Ellerman et al., 2022) ^[3]. A major deviation from previous ESOP-like models is that the trust is replaced by an employee ownership cooperative (EOC), with the statutory objective “to acquire and manage the ownership, to administer and dispose of it, and to ensure a long-term and stable participation of as many employees as possible in ownership of the operating business.” (ZLZD, 2025, Art. 8(2)).

Ensuring a “long-term and stable participation of as many employees as possible in ownership of the operating business” has proved challenging in the many decades of employee ownership experience. Despite decades of experimentation with employee ownership, very few institutional models have demonstrated the capacity to scale via firm conversions while remaining stable over time in competitive market economies. The Slovenian ESOP represents a deliberate attempt to address these challenges by drawing on documented institutional practices and responding to well-known economic and organizational failure modes of employee-owned firms. Against this background, the central research question of this paper is how the EOCA translates its statutory objective of long-term, stable and efficient employee ownership into a concrete institutional design, and how that design responds to historically documented economic and organizational failure modes of employee-owned businesses (EOBs).

This paper makes three contributions. First, it provides a systematic description of the Slovenian ESOP model as an institutionalized variant of the European ESOP. Second, it develops a functional design analysis showing how specific structural elements of the model respond to historically documented challenges of employee-owned firms in a market economy. Third, it situates the EOCA's tax and regulatory framework within comparative international practice, highlighting a distinctive model of conditional tax support tied to democratic ownership standards.

Methodologically, the paper employs a comparative-institutional and design-based approach, drawing on existing empirical literature on employee ownership models and analyzing the Slovenian ESOP as a purposive institutional response to documented economic and organizational dilemmas, rather than as an evaluation of ex post performance outcomes. Section 2 identifies the central dilemmas faced by EOBs, while Section 3 introduces the core structural mechanisms of the Slovenian ESOP. Section 4 analyses the tax and regulatory framework supporting ESOP transactions. The final section discusses implications and open questions.

Employee ownership models face a recurrent set of structural dilemmas that have limited both their diffusion and their long-term stability in market economies.

The first dilemma concerns entry, where EOBs, as a type of business ownership, are rarely introduced to the market economy (Guzek and Whillans, 2025; Mygind, 2023; Pendleton, 2002). Faced with the choice between sharing ownership and control with workers by making them partners – a move that would dilute their own stake in control and profit – most business founders prefer to retain conventional ownership structures and keep workers as employees rather than co-owners. In practice, this means that scalable employee ownership depends less on “start-up EOBs” and more on repeatable conversion mechanisms that allow incumbent owners to exit under predictable conditions (Pendleton, 2002; Mygind, 2023); however, very few frameworks have been effective in scaling employee ownership conversions. Notable exceptions are ESOP in the USA and the EOT in the UK, which facilitate, on average, between 250 and 400 EOB conversions annually in the respective countries (Gonza, 2025; Pendleton and Robinson, 2025), and have been, in 2023 and 2024, the second most popular exit option for business owners in the UK ^[4].

A second dilemma concerns durability. Even when employee ownership is established, firms may struggle to sustain it over time (Cook, 2018; Ellerman and Gonza, 2025; Gonza, 2025; Kalmi, 2002; Mygind, 2023). Economic degeneration can occur when incentive structures favor short-term distribution over long-term capital formation – an issue historically observed in systems where workers lack individuated claims to capital appreciation and therefore rationally prioritize current income, leading to economically unsustainable EOBs (Ellerman, 1986, 2013; Furubotn and Pejovich, 1970). Organizational degeneration, by contrast, refers to institutional drift away from broad-based employee ownership through dilution (existing owners exit the business with shares), concentration (new workers are not granted access to ownership) and external buyouts (Cook, 2018; Craig and Pencavel, 1995; Kalmi, 2002; Langmead, 2016; Mygind, 2023).

A third dilemma concerns valuation and liquidity. The internal valuation rule used for employee capital accounts determines the size of employees' claims and therefore the firm's future repurchase obligations (Gonza, 2025). Market-based valuation can inflate internal claims and generate liquidity burdens that push firms toward refinancing, asset sales, or partial sell-outs; overly restrictive valuation, however, can weaken the employee incentive to maintain the employee-owned form when outside buyers could offer a higher price (Pendleton, 2002; Mygind, 2023).

A fourth dilemma concerns turnover and repurchase obligation payout triggers. In many employee ownership models, repurchase obligations are triggered mechanically by employee exits or retirements. Because exits are only weakly related to firms' cash-flow capacity, this can create stochastic liquidity demands that destabilize otherwise viable firms, especially in periods of higher turnover or generational retirement waves (Gonza, 2025).

The Slovenian ESOP is designed as an integrated response to the challenges with employee ownership as described in the previous section. The model draws upon established international practices such as the employee buyout mechanisms of the US ESOP and the UK EOT, while simultaneously integrating structural elements derived from the Mondragon cooperatives of the Basque region. The conceptual framework of the Slovenia ESOP is systematically organized around a set of design principles, including:

1. Gradual leveraged buyouts through a separate EOC

2. Individual Capital Accounts (ICAs).

3. Separation of initial stock valuation and subsequent ICA valuation.

4. The rollover (or share recycling) system.

5. Dual-level democratic governance

The common entry problem in employee ownership – limited worker wealth and founder reluctance – can be addressed by introducing a leveraged acquisition mechanism executed through an EOC acting as a special-purpose vehicle.

This principle follows one of the more effective mechanisms for EOB conversions, which is the ESOP in the USA and the EOT in the UK. The ESOP mechanism allows a gradual conversion to employee ownership by creating a dedicated vehicle that buys and holds company stock in the hands of the current generation of employees. The employee stock ownership trust buys the stock through leverage, where the future profits of the operating company are employed to repay the acquisition debt – the collective capacity of workers to produce surplus value in the future is used to obtain debt capital and repay the loan as the business operates. The employees do not buy the shares out of their individual pay or savings.

While in the USA, Canada and the UK, the legal basis for the special purpose vehicle is a common law trust, in the case of the Slovenian ESOP model, the legal entity is a cooperative – an EOC. Under the EOCA, the EOC does not generate operating revenue of its own; it functions as a financing and holding vehicle whose cash inflows are contractually and distributionally linked to the operating company. The Act defines two permissible sources of cash for servicing acquisition debt and financing ongoing obligations: the ESOP contribution and dividends paid on shares held by the cooperative.

1. The ESOP contribution is a contractual transfer of funds from the operating company to the EOC, typically financed out of operating cash flow and constitutes the primary mechanism for amortizing acquisition debt incurred in the leveraged buyout. ESOP contribution is a tax-deductible expense for the operating company and a non-taxable income for the EOC, as further explained in section 4.2.

2. Once the EOC acquires shares in the operating company, it may also receive dividend income proportional to its ownership stake. Dividends represent a supplementary and more flexible source of cash, particularly after acquisition debt has been partially or fully repaid and may be used either to accelerate debt amortization or to finance rollover payouts to members' ICAs.

Together, these two cash-flow channels ensure that the buyout is financed collectively at the firm level rather than through individual worker contributions, aligning the cost of acquisition with the firm's capacity to generate surplus. Functionally, this mechanism allows employee ownership to emerge through firm-level cash flow rather than worker-level wealth.

ICAs solve the incentive problem that has historically undermined democratic forms of employee ownership by ensuring individuated capital claims by the workers without creating tradable shares.

ICAs are analogous to holding shares that have a certain value – they indicate how much capital claim or equity value an employee owner has without giving them direct ownership over that share. Say EOC with 10 members buys 30% of stock for 1.000.000€ and pays it off – the average ICA value of an EOC member is 100.000€. The allocations or vesting among ICAs is based on the distribution key – a rule that determines the difference in allocations between workers. ICAs prevent tradability of shares while at the same time providing capital value claims to employee owners. ICAs are a hybrid between equity and debt: equity in the sense that workers enjoy the financial benefit of the growth of the company and debt in the sense that ICAs are not tradable and are paid out according to a pre-determined schedule.

Different institutional traditions have resolved this tension in different ways; there are two types of ICAs, share-accounting ICAs and value-accounting ICAs. In the US ESOP, employees are not direct shareholders as the trust is the only shareholder; however, each worker receives an ICA, which is expressed in terms of shares under their name so that workers receive a proportional share of equity value in the firm. Shares are on ICAs to mimic the shareholders' rights in the way that each worker owns a “piece of the wealth pie”. We call this type of account share-accounting ICAs. Share- In the Mondragon cooperatives, ICAs are expressed in terms of monetary value “owed” to individual workers, in this case, reflecting the proportional value of profits reinvested back into the cooperatives, making accounts more debt-like than equity-like. We call this type of account value-accounting ICAs. The UK EOT does not have ICAs – it holds shares in the name of employees without providing them with capital appreciation rights, making them de facto profit-sharing schemes.

The Slovenian ESOP is built on the understanding that capital appreciation rights are important for incentives and economic viability of EOBs, but the Slovenian ESOP stays agnostic about the type of ICA that can be adopted (either the US share-accounting or the Mondragon value-accounting is allowed).

Below, we explain the ICA logic based on value-accounting ICAs. In the value-accounting ICA model, the capital claim of workers is measured in monetary value. When the EOC purchases stock at a given price (say 30% for 100.000€), this creates changes to the EOC's balance sheet – shares of corresponding value are on the asset side, acquisition debt of 100.000€ is a liability and there is 0€ of capital value at this stage ^[5]. Table 1 shows a simplified balance sheet of the EOC after the initial transaction, with 30% of stock acquired and financed fully through debt.

In this stage, the total value of shares is allocated to a suspense account and that capital value is only vested in individual workers after the acquisition debt is paid off. Table 2 illustrates, through balance sheet changes, financing of the acquisition debt – ESOP contribution (possibly coupled with dividends) is channeled through EOC to pay off part of the debt, creating capital value that is distributed among members through the system of ICAs. Say that next year the company transferred 25.000€ of ESOP contribution to EOC, paying off a quarter of the acquisition debt (ignoring interests for simplicity). When this happens, 25.000€ of value is allocated from the suspense account to ICAs so that the total value of all ICAs is 25.000€. With 10 employees, an average value of ICA is 2.500€, but the individual value of ICA depends on the distribution criterion, which can be proportional to salaries, tenure, or based on egalitarian principles.

The main difference between share-accounting ICAs, which are allowed within the Slovenian model, and the value-accounting ICAs is how the growth of capital value, which is based on the appreciation of the company's stock held by EOC, is distributed among the ICAs. Table 3 shows the balance sheet changes after the appreciation of stock held by EOC. When the value of the operating company grows, the value of assets held by EOC grows. If the company retained 100.000 € of profit, that increases the assets of EOC for 30.000 € (30% of total capital appreciation – see the valuation section below). This changes the capital value on the balance sheet of the EOC, which means that the total value of ICAs increases by 30.000 €.

In share-accounting accounts, appreciation of company stock leads to the appreciation of internal shares, which are, let's assume, already assigned to ICAs. If a new member joined ICA with an empty account and has no internal shares, the total capital value creation of 30.000 € at EOC is distributed to the members who already hold shares in ICAs. But with value-accounting ICAs, the capital value created is distributed to all active accounts based on the distribution key – not based on the existing vesting situation. In share-accounting ICA, only 10 members received a share in the capital value and the new member did not – in value-accounting ICAs, the 30.000 € of capital value is distributed to everyone who helped to create it in that year, regardless of whether they had something on their ICA prior to that event or not.

This distinction between the two types of ICAs has important implications for intergenerational equity and the speed with which new workers participate in capital value creation. Value-accounting ICAs offer a faster inclusion in capital value creation to the workers and are a fairer model since they ensure that capital value created is distributed to everyone who participates in production in that year, not only to members who already had prior distributions of shares to their ICAs.

Valuation rules are pivotal because they determine both the seller's exit price and the magnitude of employees' internal capital claims, which in turn shape future liquidity obligations. Initial valuation determines incentives for the owner to sell to ESOP. Once stock in ESOP, overvaluation reflected by ICAs can inflate repurchase liabilities and destabilize the firm, while undervaluation may weaken the employee incentive to maintain ownership and can increase sellout pressure. The Slovenian ESOP addresses this tension through a two-step valuation architecture. It permits market-based valuation at the point of entry (incentivizing initial owners to sell to EOC) ^[6] but ties subsequent internal valuations relevant for capital accounts to the operating company's net asset value (NAV), thereby linking employee capital claims to realized capital accumulation rather than market premium (Ellerman and Gonza, 2025).

It is most useful to explain the logic through a hypothetical example introduced above, where the EOC purchased 30% of the company for 100.000€. The price was determined based on fair market valuation of the company, which was 333.333 € (30% of that is 100.000€). At that point, the NAV of the operating company was 200,000 €, so the valuation was 133.333€ above the NAV of the company. When the acquisition debt is being paid off for the 30% of stock, the value assigned to ICAs is proportional to the debt payoffs – at the end of that process, assuming there was no growth in the value of the EOC's assets (stock of operating company), the total value of 100.000€ is assigned to ICAs according to the distribution criterion. Note that while the NAV of 30% is 60.000€ (30% of 200.000€), workers received, as allocations to their ICAs, 40.000€ more after the acquisition debt is paid off in full.

From that stage on, the only way for workers to receive capital value growth is to purchase new stock or for the value of existing stock grows, where the value of 30% of shares grows proportionally to the capital appreciation at the level of the operating company – this way of valuation ICAs is required by EOCA. Say that next year, the operating company will make 100,000€ in profit but invests everything in new equipment. This increases the NAV of the company from 200.000€ to 300.000€, and it increases the value of ICAs for 30% of that capital value growth (30.000€). That capital value growth is distributed to ICAs according to the distribution criterion.

This structure should help to decrease the repurchase obligation over the long term and lower the transaction costs of the EOC, since official annual valuations are not required (unlike the US ESOP, which requires costly annual valuations). But it may also introduce some additional incentive to sell the EOC stock to external investors, since the market value of the stock could be significantly higher than the NAV of the operating company. While this creates a potential wedge between market and internal value, the EOCA addresses sellout incentives through qualified majority voting requirements and tax claw-back mechanisms discussed in Section 4.

In some businesses, free cash flow generated by the operating company may not be sufficient to finance the repurchase of ICA values based on NAV valuation – for example, highly capital-intensive companies with low profitability rates. In such cases, the EOCA allows the EOC to create a Collective Capital Account (CCA) that complements ICAs. This is a solution found in Mondragon, where, generally, around 30% of changes in the NAV of the cooperative are collectivized and 70% is allocated to members' ICAs. The partial collective account, coupled with the ICA structure, serves as a self-insurance structure because it decreases the liquidity demand imposed on the EC form by the repurchase obligation, leading to greater sustainability of the employee-centered form.

Collective accounts have been commonly discussed in the literature but have also been commonly misinterpreted as a pool of resources that can help to “deal with unforeseen events affecting cooperative's operation” (Galor and Sofer, 2019). Along those lines, some propose that collective accounts should carry “out investment programs that benefit whole membership” (Tortia, 2021, 1) and could help with “fundamental difficulties in financing cooperatives” (Tortia, 2021, 2). Tortia (2018, 4) discussed asset locks to have a “primary function to self-finance investment programs, to create collateral guarantees protecting external financial supporters, and to insure the membership against negative unpredicted events”. Others have also explained the collective account to be a form of voluntary reserves, which can be used to finance investment and a protection against crises (Arando-Lasagabaster and Herce-Lezeta, 2023) ^[7].

We should stress that the collective accounts are not reserve funds that hold cash assets, which can finance the operating capital in times of liquidity crisis. Cash reserves to finance investment are simply cash in the bank account (asset category of the balance sheet, which can be specifically defined as “cash reserves” to ensure that the cash is used for specific functions). The role and main function of the collective account is to decrease the repurchase obligation – simply, to decrease the amount of capital value over which legal members have a claim.

Table 4 below shows a balance sheet to illustrate the way collectivization decreases individual claims by the workers. Say we introduce a partial, 10% CCA to our example above, where an EOC purchases 30% of the stock for 100.000 €. When 25.000 € is used to pay off the first annuity of the loan, previously that created 25.000 € of capital value for members, but now, only 90% of that value is individuated and 10% is collectivized. After the total acquisition debt of 100.000 € is paid off, 90.000 € is individuated and 10.000 € is collectivized. In the same way, if the company retains 100.000€ of profits and 30.000 € is captured as stock appreciation in EOC, now only 27.000 € is individuated and 3.000 € is collectivized.

Based on the research of Mondragon cooperatives, there is no indication that a partial collective account has negative effects on the incentive to invest profits back into the company (Arando et al., 2010; Flecha and Santa Cruz 2011; Moye, 1993; Stikkers, 2020). The main function of the collective account is “self-insurance” for the legal members to receive their share of the capital value upon their departure, that is, to receive it in the foreseeable future without needing to rely on 15 and 20 years payouts (Ellerman et al., 2022; Ellerman and Pitegoff, 1983; Wasserbauer, 2015). When the total capital value is individualized, this may lead to high liquidity demands that may threaten organizational viability, while the collective account reduces the capital claim and thus the liquidity demand imposed by the repurchase obligation.

A key source of instability in employee ownership models is the treatment of repurchase obligations. In both US ESOPs and Mondragon cooperatives, capital accounts are typically paid out upon employee exit or retirement, creating liquidity demands that are only weakly related to firms' cash-flow capacity. This subsection explains how the rollover mechanism transforms repurchase obligations from exit-triggered liabilities into cash-flow-contingent governance decisions.

In the case of US ESOPs, if a participant separates due to death, disability, or reaching the plan's normal retirement age, distributions must commence no later than one year after the close of the plan year in which the separation occurs, while for other separations (e.g. voluntary resignation), the plan may defer payouts until the fifth year of employment termination ^[8]. Coupled with market-based valuation, this may lead to crippling liquidity demands on the operating company ^[9]. There are two types of exits from the ESOP – regular exits (e.g. retirements), which can be planned and irregular exits (e.g. changes of employment), which cannot be planned (Gonza, 2025). In the case of generational exits, where a cohort of workers retires from the ESOP firm, and in the case of irregular exits, the company may need to ensure a lot of cash is paid out – cash that may not be available to the company. This may lead to either imposing new debt on the companies or it may even lead to sellouts of ESOP stock.

Unlike US ESOPs and Mondragon cooperatives, the Slovenian ESOP treats repurchase obligations as an endogenous governance variable rather than a function of worker exits. After the acquisition, the debt is paid off, rollover mechanism is introduced where the ESOP contribution to the EOC becomes a governance decision at the level of the operating company. Literature describes a rollover as a plan that provides ownership-related cash to partners in limited liability companies, so they don't have to exit or retire to get some cash from their ownership (Zeuli and Cropp, 2004, p. 63), while the mechanism has been conceptualized for use in the EOBs in the 80s ^[10].

The rollover system functions so that the oldest entries on ICAs are paid out periodically on a first-in-first-out basis (FIFO) using the ESOP contribution by the operating company. At the level of EOC, profits are used to pay off the financial obligations to members on an ongoing basis, regardless of the status of membership. In this way, the ongoing repurchase obligation to existing and previous EOC members is paid out periodically, that is, whenever there is free cash flow available at EOC, that money can be used to repay the financial obligations with the oldest date-stamp on the ICA. In practice, this means that the operating company decides (e.g., annually) on how it is going to distribute profits and how much of free cash flow it will use to channel through EOC to repay the ICA values. The repurchase obligation, thus, becomes an independent variable (a choice based on available liquidity) rather than a dependent variable (the outcome of employee turnover). Again, the logic is that the liquidity demand is not a function of exits from the company, but is completely dependent on the available cash flow at the level of the operating company. This shifts timing risk from the firm to former members, which the EOCA mitigates by making payout policy a governed distribution decision (and, where used, by partial collectivization that reduces per-capita claims) ^[11].

Let us again use an example to illustrate the functioning of a rollover. Assuming there are only two active members with ICAs in EOC (person A and person B). Table 5 shows the state of ICAs.

The balance sheet of the EOC is illustrated by Table 6.

In 2026, the board of the company decides to dedicate 15.000€ of profits for the ESOP contribution, and since there is no outstanding loan (no fixed obligation to pay for the EOC), the total amount is dedicated to the rollover. We explained that the payouts are based on the FIFO method, meaning that financial obligations to members with the oldest time stamps are paid out first. The oldest values are from 2024, where person A has 10.000 € of capital value claim from 2024, and person B has 5.000 € of capital claim from 2024. In this case, 15.000 € covers exactly the financial obligations from 2024, which means that person A is paid out in the amount of 10.000 € and person B is paid out in amount of 5.000 €.

It is important to note that the cash coming into EOC and paying off the financial obligations does not decrease the total capital value in the EOC's balance sheet – the capital value after payouts is still 30.000 €. That means that the repaid financial obligations (15.000 €) represent a capital value that must be redistributed back to ICAs, now according to the distribution criterion. If the distribution criterion is 2 to 1 in favor of person A, that means that A receives 2/3 of 15.000 € back to their account with a new date (10.000 €, 2026) and B receives 1/3 of 15.000 € back to their account with a new date (5.000 €, 2026). The payouts and end state of the balance sheet are illustrated in Tables 7 and 8 below.

In this case, rollover did not change the result in terms of value distributed to ICAs – when everything turns around, A now has 20.000€ of capital claim (10.000€ from 2025 to 10.000€ from 2026) and B now has 10.000€ of capital claim (5.000€ from 2025 to 5.000€ from 2026). Therefore, when there is no fluctuation of workers or if the distribution criterion is not changed during rollover, rollover serves as a kind of profit-sharing scheme; however, the main function of rollover comes into effect when members leave the EOC or new workers join.

If a new worker joins an EOC, they join with an empty account (aside from a nominal membership fee required by cooperative law, which we neglect for the purpose of this example), but the rollover fills that account. For example, say that in 2027 the company, now with a new employee, dedicates again 15.000 € as an ESOP contribution. The money is used to pay off the oldest accounts – now from 2025, which is 15.000 €, meaning that, like in the previous year, A receives a payout of 10.000 € and B receives a payout of 5.000 €. Note that C does not get any payout that year, but they receive part of the capital value that is re-allocated after the rollover (15.000€ is distributed according to the distribution criterion – for simplicity, let's assume the distribution criterion is now an equal distribution to all, so 15.000 € is allocated in three equal parts to all three EOC members). Worker C will not start receiving payouts until their ICA values come to maturity, meaning that there is no older financial obligation to other members that still needs to be paid out. Table 9 shows the state of ICAs after the rollover.

Now, to illustrate what happens when someone leaves the company – say that A retires in 2028, which means that, according to EOCA, they also lose the right to membership in EOC. After exit, the financial obligation by EOC to member A is determined based on their ICA (15.000 €). Assume that the operating company has no profits to share next year, since it is investing all the profits in equipment. Despite A leaving, there are no payouts in 2028. In 2029, the board decides to dedicate 15.000 € of profit to rollover. Looking at the oldest dates, we see that 15.000 € covers total financial obligations from 2026, meaning that in that year, A, who is no longer a member, receives 10.000 € of a payout and B, who is still a member, receives 5.000 € of a payout. Now the value paid out is again re-allocated to all the active accounts, B and C (based on equal distribution, each receives 7.500 € of capital value on their ICA with a new date), while A does not receive additional allocations. A has a financial claim over EOC until the total obligation is paid out, but it does not have the right to be paid out outside the rollover schedule. The balance sheet of 2029 is presented in Table 10.

Rollover thus converts a stochastic, exit-driven liability into a predictable, governance-controlled profit distribution process, substantially reducing liquidity risk without eliminating workers' capital claims:

1. By enabling new members to “buy in” through the sequential retirement of older capital accounts, rollover mitigates discontinuities in membership consolidation and enhances organizational stability.

2. Rollover removes stochastic triggers that, in the US ESOP, can generate unpredictable liquidity shocks and speculative exit incentives. Rollover therefore converts repurchase obligations into a manageable, endogenously determined liquidity demand, reducing pressures that otherwise might force firms into undesirable leverage, asset sales, or restructuring.

3. By gradually equalizing values across ICAs, rollover moderates intergenerational risk imbalances and strengthens the link between members' financial returns and current firm performance, thereby improving incentive alignment.

To conclude, we examine the Slovenian ESOP model's dual-level governance architecture and its role in reconciling democratic member control with effective exercise of shareholder rights and organizational professionalization.

At the EOC level, the decision-making body is the general assembly, and the EOCA explicitly codifies the core democratic rule that each member has one vote, regardless of capital position (ZLZD, 2025, Art. 21(1)–(2); Art. 23(1)). This rule is particularly important in the Slovenian ESOP context because the model is designed to separate capital claims from governance rights, thereby limiting the familiar drift toward investor-like control and preserving “one-person/one-vote” decision-making typical of cooperative forms (Ellerman et al., 2022).

EOCA specifies a governance structure that scales with membership size. The EOC that has less than 50 members must have the general assembly (consisting of all members), an auditor and a president, but it may also have a supervisory and management board (ZLZD, 2025, Art. 18(1)). Once membership reaches 50 or more, both a supervisory board and a management board become mandatory, with at least three members on each board (ZLZD, 2025, Art. 18(1)–(3)). This type of governance structure allows for deliberate participation in smaller EOBs, while adequate internal checks and role specialization are established in larger ones – an issue repeatedly emphasized in the cooperative governance literature where scale often increases the need for formalized oversight (Cook, 2018; Mygind, 2023).

A notable feature is the Act's explicit allowance for external expertise in governance. The president, auditor and members of the supervisory or management board may also be individuals who are not cooperative members, including external professionals, provided there is no conflict of interest with the operating company (ZLZD, 2025, Art. 24(3)). Coupled with a dual-level governance architecture, this provision can mitigate a recurring practical challenge in EOBs related to building financial, legal and strategic capability during the early years of employee ownership without undermining democratic control. Research on employee ownership governance emphasizes that allocating governance rights and financial participation involves complex decision structures that interact with organizational and contextual conditions, suggesting a need for governance competence beyond worker membership alone (Del Sordo and Zattoni, 2025).

At the same time, the EOCA introduces safeguards to prevent conflicts of interest in governance. Managers or members of management bodies of the operating company (or included subsidiaries) or a person holding at least 25% of control rights in the operating company cannot serve as president or board members of the EOC (ZLZD, 2025, Art. 19(1)–(2)).

The “bridge” between cooperative democracy and corporate shareholding is built through the rule that the general assembly at the EOC level (all members of the EOC, that is, all employee owners) decides how the EOC representatives (president or the board) vote at the shareholders' meeting of the operating company (ZLZD, 2025, Art. 21(2)), while the EOC's voting rights are proportional to the stock held by the EOC. In practice, this creates a mandate-based model – the cooperative's elected bodies act as proxy voters in the company, but the mandate originates in member deliberation and assembly resolutions.

Taken together, the leveraged acquisition mechanism, individualized capital accounts, NAV-based internal valuation (with optional partial collectivization), rollover payouts and dual-level governance form a mutually reinforcing institutional system. The structural design targets the historical failures in the employee ownership sector – limited entry, weak capital individuation, valuation-driven liquidity shocks and exit-triggered repurchase crises – while preserving democratic control and allowing professional competence to be incorporated without transferring control rights. Table 11 summarizes the relationship between features and design improvements. The structure of the Slovenian ESOP model, however, requires complementary tax and regulatory arrangements to be credible and durable. Section 4, therefore, examines how the EOCA conditions fiscal support on broad-based participation and sustained compliance.

The EOCA aims to establish a “long-term and stable participation of employees in the ownership of business companies in which they are employed” (ZLZD, 2025). To achieve that, structural features are not sufficient – tax incentives and regulatory framework play an important part in meeting the objectives of the legislation. In this section, we summarize the role of tax incentives and explain tax incentives for EOC, and describe the regulatory framework that establishes the minimal standards required for EOC to obtain special tax status.

International EOB experience suggests that broad-based employee ownership conversions rarely scale without a supportive tax treatment. This is clearest in the two most influential contemporary conversion models – the US ESOPs and UK EOTs.

In the USA, Congress enacted a sequence of favorable tax rules that provide benefits to underlying ESOP companies, employees, lenders and selling shareholders. The National Center for Employee Ownership explains that ESOPs are supported by a suite of tax incentives that benefit sponsoring companies, employees, lenders and selling shareholders, reducing the cost and complexity of employee ownership and thereby making ESOP conversions more economically feasible in practice ^[12]. ESOP adoption increase coincides with a sequence of statutory tax measures beginning in 1974, with major expansions in the mid-1980s, with econometric evidence indicating that tax/incentive variables were significant predictors of leveraged ESOP adoption (Beatty, 1994; Kruse et al., 2010).

In the UK, the Finance Act 2014 introduced a dedicated tax incentive package for EOT buyouts (most prominently a capital gains tax relief for qualifying sales to an EOT and an income-tax exemption for qualifying employee bonus payments) explicitly designed to encourage employee trust ownership structures, and the regime has been refined in subsequent years, including changes to relief conditions in 2024 and adjustments to relief levels in 2025, where capital gain tax reduction was cut from 100% to 50% ^[13]. Contemporary UK data also illustrates strong diffusion with the Employee Ownership Association reporting more than 1,650 employee-owned businesses, while sector reporting documents rapid growth in EOT conversions since the post-2014 period (Pendleton and Robinson, 2025) with reported annual growth of 67% during 2014–2022 (WPI Economics, 2023) and a 1.600% growth of the EOB sector between 2014 and 2025 ^[14].

Canada's recent EOT framework similarly pairs legal recognition with tax measures. The Canada Revenue Agency explains that a targeted capital gains exemption is intended to stimulate succession sales to employees (CRA, 2024). This international pattern represents the policy premise embedded in the EOCA. To allow meaningful EOB adoption rates in Slovenia, the ESOP vehicle must be competitive with alternative exit routes – strategic sales, private equity buyouts, or family transfers – each of which carries its own financial advantages. The EOCA tax framework thus creates three pillars of tax benefits to (1) motivate owners to sell, (2) lower financing costs and (3) ensure employees perceive real, intelligible benefits.

For the seller, the EOCA provides a direct capital gains incentive by decreasing the tax base for capital gains realized on a sale of shares to the EOC by 20% relative to the base calculated under general personal income tax rules (ZLZD, 2025, Art. 46(2)). This is more modest than the UK EOT's previous 100% capital gain tax (CGT) relief (since 2025, 50% relief) for qualifying disposals and the US approach, where §1042 provides deferral of capital gains tax for qualifying C-corp ESOP sales when proceeds are reinvested in qualified replacement property. Nonetheless, a partial CGT reduction may still be significant in a context where sellers compare multiple exit channels and where liquidity constraints (seller financing) can be decisive.

EOCA also addresses a subtle valuation/tax risk present in related-party transactions, as strict fair-market valuation requirements in the USA, historically enforced under the Employee Retirement Income Security Act and overseen by the US Department of Labor, have been cited by ESOP practitioners as creating legal uncertainty and compliance costs that can discourage sellers from pursuing an ESOP conversion ^[15]. The EOCA allows the contractually agreed stock value to be used for tax purposes rather than being automatically adjusted to an imputed “arm's length” comparable market price if valuation is based on NAV of the operating company (ZLZD, 2025, Art. 46(1)). If the seller wants a fair market price, the stock appraisal must be made by an independent certified valuation expert. This rule should reduce transaction costs and uncertainty related to structuring negotiated sales.

The second tax benefit pillar targets the central economic condition of leveraged employee buyouts – paying acquisition debt from future operating cash flows. The EOCA does this primarily through favorable tax treatment of the ESOP contribution (i.e. the operating company's payments to the cooperative under a contribution agreement).

At the operating company level, payments to the EOC under the contribution agreement are treated as tax-deductible expenses, subject to a statutory cap (ZLZD, 2025, Art. 41; Art. 29). Importantly, unlike in the US ESOP regime, the cap is not linked to payroll. Instead, it is linked to the multiplier of the percentage of the ownership share held by the EOC and the firm's earnings before interest, taxes, depreciation, and amortization (EBITDA) in the prior year (ZLZD, 2025, Art. 29(4)). In functional terms, this avoids a possible distortion of payroll-based caps, which can disadvantage capital-intensive firms where labor cost is a smaller fraction of total operating cost, even though free cash flow might still support amortizing acquisition debt. EOCA's cap can thus be interpreted as an attempt to universalize the deduction capacity across, but also as an attempt to incentivize having a larger percentage of ownership at the EOC level (at 100% EOC ownership, the company could theoretically transfer 100% of the previous year's EBITDA to reduce corporate income tax rate).

EOCA creates a complementary rule by reducing EOC's corporate tax base by 100% of financing income received from the operating company, if those funds are used in accordance with the Act's purpose and rules (ZLZD, 2025, Art. 42). This effectively prevents leakage of the financing stream through taxation at the cooperative level, preserving more cash for debt service and rollover payouts. Since the EOC is a holding and distribution vehicle rather than an operating profit center, this tax neutrality is crucial for the mechanism to function as intended.

A third pillar targets employee incentives and engagement with employee ownership conversion. The EOCA clarifies that credits to the ICAs are not treated as taxable income and are not subject to social security contributions (ZLZD, 2025, Art. 47). This matters because one recurring weakness in employee financial participation schemes is that workers may face taxation at the point of accrual, even when the benefit is illiquid. By preventing taxation on non-cash accruals, the law improves perceived fairness and reduces liquidity stress.

For actual cash distributions, the law distinguishes between distributions during membership and those upon/after termination of membership.

1. As explained in Section 3.4, members may receive payouts during the rollover payments. Distributions during membership are taxed as dividends with a flat tax rate of 25% (ZLZD, 2025, Art. 48(1)).

2. For distributions after the termination of membership, the default classification is also dividend taxation, net of the paid-in mandatory share, but the tax rate mimics the capital gain tax rate in Slovenia (ZLZD, 2025, Art. 48(2)–(3)). Tax rate on the difference between the initial price of membership share and departing price of the membership share, which is adjusted for individual capital claim as indicated by an individual's ICA, is a falling tax rate (20% after 5 years, 15% after 10 years and 0% after 15 years (ZLZD, 2025, Art. 48(3)). This is a distinctive design choice. Functionally, the rule aims to strengthen long-term retention and commitment to the cooperative project, reinforcing the sustainability objective of the Act.

The statutory objective of the EOC Act (ZLZD) is a “long-term and stable participation of employees in the ownership of business companies in which they are employed” (ZLZD, 2025). A core design principle of the EOCA is that tax advantages are conditional on meeting – and continuing to meet – substantive standards that operationalize broad-based and democratic employee ownership. The Act, therefore, links eligibility for the special status of an EOC to strong inclusion and governance constraints.

First, the cooperative can obtain the special status only if it includes at least 75% of all workers who meet the membership conditions (ZLZD, 2025, Art. 9(1) (2)). The scope of “worker” is defined broadly to include employees of the operating company and employees of subsidiaries controlled by the operating company through ownership/voting rights thresholds (ZLZD, 2025, Art. 4(1) and Art. 4(11)). This matters because many employee ownership arrangements can be undermined by excluding subsidiary workforces from ownership, thereby preserving a two-tier labor structure. Second, barriers to entry are legally constrained. The initial price of the mandatory membership share cannot exceed €300, must be paid in cash and each member may subscribe only one mandatory share (ZLZD, 2025, Art. 25(1)–(3)). This statutory cap is functionally important as it reduces the risk that membership becomes de facto stratified by income or liquidity constraints, reinforcing the “broad-based” goal.

Third, the EOCA constrains internal inequality in capital value allocation. While the cooperative may use distribution criteria (e.g. salary, hours, tenure), the periodic distributions of capital value to individual members cannot exceed a ratio of 1:8 (ZLZD, 2025, Art. 39(2)). In comparative terms, this is a direct attempt to reconcile incentive alignment with egalitarian participation, echoing concerns in employee ownership scholarship that overly steep internal differentials can weaken perceptions of fairness and participation, undermining long-term commitment (Mygind, 2023).

Compliance is not one-off. The EOCA empowers the ministry to place the status into abeyance if conditions are not met, during which the cooperative cannot acquire new stakes and cannot use the special tax incentives (ZLZD, 2025, Art. 12(1)–(2)). If compliance is not restored, status can ultimately be withdrawn, including where the cooperative fails to regain compliance within two years of the start of abeyance (ZLZD, 2025, Art. 15(1) (8)). This is the institutional mechanism that transforms tax relief from a one-time subsidy into a continuing exchange – fiscal support in return for sustained democratic ownership.

Finally, the EOCA tries to build a deterrent against opportunistic use of the cooperative as a tax shelter. If the cooperative sells part or all of the stake (or loses its special status), it must “repay” the benefit by increasing the tax base in the year of sale by the amount of the tax relief previously claimed over the preceding ten tax periods, proportional to the stake sold (ZLZD, 2025, Art. 45(1)–(2)). The so-called “tax clawback provision” resembles anti-abuse provisions in public finance and incentive policy domains, where recapture provisions require entities that have received tax incentives or subsidies to return those benefits if they fail to meet specified performance conditions (e.g. job creation or investment commitments). Functionally, this mirrors tax clawback provisions tied to employee ownership outcomes, whereby tax relief is conditional on the sustained achievement of EOCA objectives after the EOC conversions.

A key takeaway from the EOCA is that tax incentives are not merely add-ons; they are embedded in an enforcement framework that operationalizes legislative intent. Status can be suspended when conditions fail (with corresponding loss of tax benefits) (ZLZD, 2025, Art. 12(1)–(2)), reinstated when conditions are restored (ZLZD, 2025, Art. 13) and withdrawn for substantive violations – including misuse of funds, acquiring stakes outside the permitted scope, or failure to regain compliance after extended abeyance (ZLZD, 2025, Art. 15). The clawback rule then adds a fiscal consequence that is deliberately large enough to shape behavior with the EOC that exits the regime must effectively repay up to ten years of tax benefit (ZLZD, 2025, Art. 45).

By tying incentives to sustained inclusion (75% participation), democratic governance (one-member/one-vote), bounded inequality (1:8) and long-horizon anti-sellout rules (clawback), the Slovenian ESOP regime aims to capture the adoption benefits of the USA and UK pattern while reducing the risk that the employee ownership vehicle becomes a transient tax-optimization structure rather than a durable institutional form.

This paper has examined the Slovenian EOC Act as a purposive institutional response to long-standing challenges in the design and durability of employee-owned businesses. Rather than evaluating ex post outcomes (which necessarily remain unknown at this early stage), the analysis has focused on how the EOCA translates its statutory objective of “long-term, stable, and efficient” employee ownership into a concrete structural, fiscal and regulatory architecture. The central research question asked how this institutional design responds to historically documented economic and organizational failure modes of employee ownership.

Initially, we identified four prevailing dilemmas of EOBs – entry, durability, valuation-driven liquidity risk and exit-triggered instability. Section 3 explained a tightly integrated set of structural mechanisms that are expected to deal with these challenges:

1. Leveraged acquisition through a dedicated EOC lowers entry barriers and addresses the founder's dilemma by enabling firm-level financing of ownership transitions without requiring employee self-financing.

2. ICAs individuate workers' capital claims while preventing share tradability, thereby aligning incentives without undermining collective control.

3. Separation of initial valuation and ICA valuations based on net-asset value of the underlying company, coupled with optional partial collectivization, maintains incentives for initial sellers to move towards employee buyout while at the same time constraining the growth of repurchase obligations to realized capital accumulation, addressing a recurrent source of liquidity stress.

4. The rollover mechanism replaces exit-triggered repurchase obligations with cash-flow-contingent governance decisions, transforming a stochastic liability into a predictable and manageable distribution process.

5. Finally, dual-level democratic governance links cooperative decision-making with the exercise of shareholder rights in the operating company, while allowing the inclusion of external expertise under clearly defined safeguards against conflicts of interest.

The Slovenian ESOP model thus exemplifies a design-based approach to employee ownership, in which capital structure, governance rules, valuation discipline and payout mechanisms are treated as interdependent components rather than modular add-ons.

Section 4 showed that this structural architecture is complemented by a carefully conditioned tax and regulatory framework. Consistent with international experience in the USA, the United Kingdom and Canada, the EOCA recognizes that employee ownership conversions rarely scale without fiscal support that makes them competitive with alternative exit routes. At the same time, Slovenia departs from purely incentive-driven approaches by conditioning tax benefits on continued compliance with substantive democratic ownership standards. Inclusion thresholds, limits on internal inequality, governance requirements and a long-horizon tax clawback mechanism collectively transform tax relief from a one-time subsidy into an ongoing exchange between the state and the cooperative. In functional terms, fiscal support is granted in return for sustained broad-based participation and democratic control, reducing the risk that the ESOP vehicle becomes a transient tax-optimization structure rather than a durable ownership form.

From a policy perspective, the EOCA contributes a novel European variant of the ESOP model that explicitly integrates cooperative law, capital-account design, valuation rules and tax enforcement. The Act demonstrates how lessons drawn from diverse employee ownership traditions, especially the US ESOPs, UK EOTs and Mondragon cooperatives, can be recombined into a coherent institutional framework adapted to a continental European legal environment. Ongoing policy initiatives, including the development of dedicated financing infrastructure and loan guarantees in cooperation with commercial banks and European investment institutions, may further strengthen the model's practical viability by addressing remaining constraints on acquisition financing.

At the same time, the Slovenian ESOP remains an institutional experiment. Its ultimate success will depend on adoption rates, sectoral diffusion, firm-level governance practices and macroeconomic conditions that cannot be assessed ex ante. Based on a recent report on succession challenge published by the Slovenian Government, an estimated 34%–51.8% of closely held businesses employing more than five individuals are projected to undergo ownership transitions within the next decade ^[16]. At the same time, less than one-quarter of business owners currently have established succession plans in place. In the survey, employee ownership has been designated by respondents as the third most popular exit option, indicating the opportunity for broad adoption of Slovenian ESOP in the following decade.

Future research should therefore track the evolution of employee ownership in Slovenia, examine how firms and workers navigate the Act's structural mechanisms in practice and assess whether the anticipated benefits – stability, inclusion and economic viability – materialize over time. Comparative studies may also explore whether the Slovenian approach offers transferable insights for other European jurisdictions seeking scalable and durable models of democratic employee ownership.

In this sense, the Slovenian ESOP does not claim to resolve all challenges associated with employee ownership. Rather, it represents a deliberate attempt to institutionalize decades of accumulated experience into a single, internally coherent structural, fiscal and regulatory design. Whether this design marks a new era for democratic ESOPs in Slovenia and beyond remains an empirical question, but one that is now framed by a clearly articulated institutional blueprint.

A large language model (ChatGPT, OpenAI) was used during the preparation of this manuscript for language editing, stylistic refinement and clarity of expression. The model was used to assist in revising drafts, improving readability, and ensuring consistency of terminology, but it did not generate original theoretical arguments, empirical content, legal interpretations or substantive analytical claims. All conceptual framing, institutional analysis, interpretations and conclusions are the sole responsibility of the author.