Portfolio 62-2nd: ESOPs in Corporate Transactions

I. Introduction

II. ESOP Benefits
A. Tax-Deductible Payment of Principal on ESOP Loans
B. Deductibility of Dividends Paid on ESOP Stock
C. Tax-Free Rollover on Sales to an ESOP
D. Broadened Ownership of Corporation
E. Liquidity
F. Employee Benefit
G. S Corporation ESOPs—Opportunity for Income Tax Savings

III. The ESOP Trustee and ESOP Advisers
A. Inside Versus Outside Trustees
1. Conflicts of corporate officers
2. Inside information
3. Conflicts among buyers
4. Removal of the trustee after the transaction
B. Independent Financial and Legal Advisers
C. Valuation and Procedural Issues
1. Adequate consideration determination
2. Appropriateness of control premium
3. Marketability discount
4. Equity allocation
5. Procedural prudence

IV. Implementing the ESOP Transaction
A. Tax-Related Requirements
1. Leveraged ESOPs
2. Deductibility of dividends on ESOP stock
3. Nonrecognition of gain on sales to ESOPs
a. Section 306 stock
b. Excise tax on dispositions
B. Corporate Law Considerations
1. Pass-through voting
2. Fully paid and nonassessable shares
3. Defensive takeover strategies
4. Offensive takeover strategies
C. Securities Law Considerations
1. Registration and exemptions from registration
a. Participants’ interests in the ESOP
b. Sale of employer stock to ESOP by employer
c. Sale of employer securities to ESOP by existing stockholder
d. Sales to other investors in the transaction
e. Plan conversions
f. Sales by participants of their distributed securities
2. Exchange Act requirements
a. Section 10(b)
b. Section 13
c. Sections 14(d) and 14(e)
d. Section 16
3. Stock exchange rules
D. Financing Principles
1. Direct or inside loans
2. Nonrecourse nature of loan
3. Refinancings of ESOP loans
E. Accounting for ESOPs
1. Statement of Position 76-3
a. Recording a leveraged ESOP’s obligation in the employer’s financial statements
b. Recording the offsetting debit to the recorded liability
c. Reducing the recorded liability
d. Measuring compensation expense
e. Reporting dividends paid and earnings per share
2. Statement of Position 93-6
a. Share issuance
b. Expense recognition
c. Dividends on ESOP shares
d. Earnings per share
e. Reporting loans and interest
3. Financial Accounting Standards Board Statement No. 150

V. Documenting the ESOP Transaction
A. Trustee Engagement Letter
B. Financial Adviser Engagement Letter
C. ESOP Plan and Trust
D. ESOP Stock Purchase Agreement
E. Loan Agreements
F. Valuation Opinion

VI. Representative ESOP Transactions
A. Sale By Founder in §1042 Transaction
1. Fiduciary issues
2. Tax issues
3. Corporate law issues
4. Securities law issues
B. Corporate Divestiture
1. Fiduciary issues
2. Tax issues
3. Corporate law issues
4. Securities law issues
C. Corporate Restructuring
1. Fiduciary issues
2. Tax issues
3. Corporate law issues
4. Securities law issues
D. Sale by ESOP
1. Fiduciary issues
2. Tax issues
3. Securities law issues
E. Troubled Company ESOP
1. Fiduciary issues
2. Tax issues
3. Corporate law issues