WHAT IS AN ESOP
Employee Stock Ownership Plans (ESOPs) were created by the Employee Retirement Income Security Act of 1974 (ERISA). An ESOP is a qualified, defined contribution employee benefit plan created by the employer-company that is designed to invest primarily in the stock of the employer-company. Over time, ESOP participants acquire company stock in their respective ESOP stock accounts. As the stock in the company appreciates, the value of the participants' ESOP accounts increases, creating a valuable retirement benefit.
An ESOP is also a liquidity and diversification strategy for owners of stock in privately-held companies. An ESOP gives such business owners the ability to sell their stock for fair market value. Instead of trying to find a third party buyer who will pay fair market value, a business owner effectively "creates" a buyer by establishing an ESOP. That buyer, the employees, will pay fair market value for the stock. To induce employers to establish ESOPs, the Internal Revenue Code provides substantial tax incentives. For instance, depending on the structure of the ESOP transaction, the sellers may be able to defer indefinitely any capital gains taxes on the sale of their shares.
In a leveraged ESOP, the Company makes tax deductible contributions to the ESOP to enable the ESOP to purchase the stock of the owners. The sellers can finance the ESOP's purchase by accepting a promissory note from the ESOP. If the sellers seek to obtain cash at closing, the company can also obtain bank financing, the proceeds of which are then loaned to the ESOP, which, in turn, pays the sellers for their stock. In either instance, the ESOP pays back or amortizes its loan using tax-deductible contributions from the company.
An ESOP is required to have a trustee that manages or controls plan assets. At the outset of the ESOP transaction, the company appoints a trustee on behalf of the employees to make the fiduciary decision to acquire the stock at a certain price. The trustee is the legal owner of the shares the ESOP purchases from the sellers (the employees are the beneficial owners). Upon the consummation of the ESOP transaction, the trustee serves in a fiduciary capacity, responsible for, among other things, monitoring company operations. However, the trustee seldom takes a seat on the company's board of directors. Accordingly, even if the ESOP acquires 100% of the stock of the company, the former owners may be able to retain full operational control of the company.
Benefits of an ESOP
LIQUIDITY AND DIVERSIFICATION
ESOPs in the NewsSee here for an article that appeared in the Op-Ed section of the New York Times on July 6, 2013 by professor Gar Alperovitz describing the benefits of ESOPs to sellers and employees.
RECENT TRANSACTION HISTORY
Leveraged-ESOPs and Reorganizations:
An ESOP is also a liquidity and diversification strategy for owners of stock in privately-held companies. An ESOP gives such business owners the ability to sell their stock for fair market value. Instead of trying to find a third party buyer who will pay fair market value, a business owner effectively "creates" a buyer by establishing an ESOP. That buyer, the employees, will pay fair market value for the stock. To induce employers to establish ESOPs, the Internal Revenue Code provides substantial tax incentives. For instance, depending on the structure of the ESOP transaction, the sellers may be able to defer indefinitely any capital gains taxes on the sale of their shares.
In a leveraged ESOP, the Company makes tax deductible contributions to the ESOP to enable the ESOP to purchase the stock of the owners. The sellers can finance the ESOP's purchase by accepting a promissory note from the ESOP. If the sellers seek to obtain cash at closing, the company can also obtain bank financing, the proceeds of which are then loaned to the ESOP, which, in turn, pays the sellers for their stock. In either instance, the ESOP pays back or amortizes its loan using tax-deductible contributions from the company.
An ESOP is required to have a trustee that manages or controls plan assets. At the outset of the ESOP transaction, the company appoints a trustee on behalf of the employees to make the fiduciary decision to acquire the stock at a certain price. The trustee is the legal owner of the shares the ESOP purchases from the sellers (the employees are the beneficial owners). Upon the consummation of the ESOP transaction, the trustee serves in a fiduciary capacity, responsible for, among other things, monitoring company operations. However, the trustee seldom takes a seat on the company's board of directors. Accordingly, even if the ESOP acquires 100% of the stock of the company, the former owners may be able to retain full operational control of the company.
Benefits of an ESOP
LIQUIDITY AND DIVERSIFICATION
- Creating a buyer for a company's stock
- Shareholders can use ESOP for partial exit, but continue running the business
- Can do partial or 100% sale
- Pay fair market value for the equity
- For partial sale, company can deduct purchase price of stock over time
- If company is owned 100% by ESOP and is an S Corp, permanently tax-free
- Either way, substantially increases the cash flow
- Sellers can pursue a 1042 rollover-defer/eliminate capital gains taxes
- Selling shareholders continue working and earning their living at the company
- Board of Directors retains control over business operations
- Stock in ESOP allocated to employees over time, based on wages
- Can use additional incentives for key management
ESOPs in the NewsSee here for an article that appeared in the Op-Ed section of the New York Times on July 6, 2013 by professor Gar Alperovitz describing the benefits of ESOPs to sellers and employees.
RECENT TRANSACTION HISTORY
Leveraged-ESOPs and Reorganizations:
- Represented the company, a manufacturer of licensed-brands of sports apparel, in the reorganization and recapitalization of the company and affiliates, in connection with a leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $120,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the company, a motion picture theater operator, in the reorganization and recapitalization of the company and affiliates (including the statutory merger of affiliates and transfer of membership interests), in connection with a leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $64,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions ($5,000,000 revolving credit facility; $50,000,000 term loan facility; and $18,000,000 one-day bridge loan), debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the company, a designer and manufacturer of licensed-brands of children's apparel, in the reorganization and recapitalization of the company and several affiliates (including the statutory merger of affiliates and purchase of membership interests), and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $36,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions ($65,000,000 revolving credit facility), distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the company, a designer, manufacturer and marketer of young women’s denim products, in the reorganization and recapitalization of the company and affiliates, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $34,200,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, and primary financing transactions ($35,000,000 senior secured reducing revolving credit facility and factoring facility; and $14,200,000 one-day bridge loan), distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, subordinated security interests and pledges of assets and stock, management incentives, deferred compensation, warrant issuance, and exclusive licensing of marks.
- Represented the company, a privately-held aggregator of international and domestic long-distance services [deploying Voice-Over-IP (VOIP) technology], in a $25,000,000 ESOP purchase transaction designed to permit installment sale tax treatment for shareholders, and to create a “for profit, tax-exempt entity” through the reorganization of a limited partnership to an S-corporation wholly-owned by an ESOP (a qualified plan known as an Employee Stock Ownership Plan). Advised the company and management in connection with the conversion and reorganization of the company, and simultaneous redemption of all outstanding stock and leveraged-ESOP transaction for the transfer of 100% of the Common Stock of the company for $25,000,000, including creation of the Trust and Plan, preparation of Redemption Agreement and Subscription Agreement, primary financing transactions ($4,000,000 Revolving Credit Facility and facility for foreign receivables guaranteed by the Export Import Bank of the United States subject to Master Guarantee Agreement; $23,500,000 in Seller Subordinated Notes; and $25,000,000 internal ESOP loan), distribution of AAA balances and subordinated loan-back, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of corporate governance charters addressing management.
- Represented the company, a designer, manufacturer and marketer of lawn and garden products, in the reorganization and recapitalization of the company and affiliates, in a seller-financed leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $23,700,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, and subsequent debt restructuring through primary financing transactions ($23,000,000 revolving credit facility; $12,000,000 term loan facility; and $11,700,000 one-day bridge loan), distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the company, a manufacturer of texturized and synthetic yarns, in the recapitalization of the company, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $19,230,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions ($40,000,000 revolving/term credit facility), distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the company (a designer and manufacturer of branded, licensed and private label children’s apparel for toddlers to teens) in a $17,100,000 ESOP purchase transaction designed to permit the selling shareholders (three brothers) to eliminate capital gains taxes on their sale proceeds by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Advised the company and shareholders in connection with the contribution, reorganization and recapitalization of a holding company enterprise, and subsequent leveraged-ESOP transaction for the transfer of 30.0% of the Class B Convertible Preferred Stock of a New York holding company for $17,100,000, including creation of the Trust and Plan, primary financing transactions ($14,000,000 revolving credit facility; $5,000,000 term loan facility; and $7,900,000 one-day bridge loan), subsequent sale of $7,900,000 of Seller Subordinated Notes, negotiated new credit facility, holding company inter-company loans, distribution of S-corporation AAA balances ($9,200,000), debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of management incentive plan.
- Represented the company, a manufacturer of linens, in the reorganization and recapitalization of the company, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $7,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the 1042 Investors in a $148,000,000 structured-finance transaction through special purpose entities designed to permit selling shareholders to make qualifying purchases of instruments constituting “Qualified Replacement Property” as defined in Section 1042 of the Internal Revenue Code of 1986, as amended.
- Represented the Trustee (Corporate Fiduciary) in a redemption transaction for the transfer of $230,908,000 of ESOP-owned stock of an industrial fan company, satisfaction of ESOP loans, and subsequent merger of Plan into existing Section 401(k) and Savings Plan.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of an electronics manufacturer, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $200,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, secured subordinated debt, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in an $85,000,000 ESOP purchase transaction designed to permit the selling shareholder (a family limited partnership) to eliminate capital gains taxes on their sale proceeds (a tax savings of more than $17Million) by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Advised the Trustee in connection with the contribution, reorganization and recapitalization of a full-service transportation, tours and activities provider, and subsequent leveraged-ESOP transaction for the transfer of 43.5% of the Class B Convertible Preferred Stock of a Delaware holding company for $85,000,000, including creation of the Trust and Plan, primary financing transactions ($39,000,000 one-day loan; $46,000,000 of Inter-Company dividends; and $85,000,000 internal ESOP loan), subsequent sale of $39,000,000 of Seller Subordinated Notes, amendment to existing credit facility, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of management incentive plan.
- Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in a $37,000,000 ESOP purchase transaction designed to permit the selling shareholders (3 brothers) to eliminate capital gains taxes on their sale proceeds (a tax savings of more than $7Million), while at the same time creating a “for profit, tax-exempt entity” through the organization of an S-corporation holding company that is wholly-owned by an ESOP (a qualified plan known as an Employee Stock Ownership Plan). Advised the Trustee in connection with the contribution, reorganization and recapitalization of a New York-based licensed apparel manufacturer (of handbags, computer bags, and carrying cases for electronic devices), and subsequent leveraged-ESOP transaction for the transfer of 100% of the Common Stock of a holding company for $37,000,000, including creation of the Trust and Plan, primary financing transactions ($55,000,000 Credit Facility to Affiliates; Inter-Company Credit Facility of $52,000,000 term/revolver; and $37,000,000 internal ESOP loan), exclusive license agreements, general and administrative services agreements, inventory management and sales agreements, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, creation of management incentive plan, and subsequent S-corporation election for the ESOP-owned company.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of an apparel manufacturer (licensed brands), and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $45,500,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions ($60,000,000 Credit Facility), subordinated debt, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in the role of successor trustee in the negotiation of third-party sale in 2007 of an apparel manufacturer (licensed brands) to US operating subsidiary of a public company traded on Hong Kong Exchange for $129,000,000, subsequent to a leveraged-ESOP (Employee Stock Ownership Plan) transaction in 2005 for the transfer of Class B ESOP Convertible Preferred Stock of company. Net proceeds to the ESOP exceeded $4,600,000 after repayment of all acquisition debt and excise taxes.
- Represented the Trustee (Professional Fiduciary) in a leveraged-ESOP (Employee Stock Ownership Plan) transaction for the purchase of all of the issued and outstanding Common Stock of a non-union contractor (specializing in storm drain, water, sewer, and underground fire protection construction servicing residential, commercial, and public works sectors), including amendments to the existing Trust and Plan, purchase of capital stock for $35,000,000 (representing approximately 69.6% of the fully-diluted equity post-transaction, after giving effect to the detachable warrants and management incentive plan), primary financing transactions (including cash contributions of $2,400,000; $10,000,000 senior term loan; and $29,000,000 demand loan), subsequent S-corporation election, offering and issuance of $29,000,000 Junior Subordinated Notes with detachable warrants (to purchase approximately 27.5% of the fully-diluted equity post-transaction), approval of a management incentive plan (permitting awards of stock appreciation rights representing up to 15% of the fully-diluted equity post-transaction), and subordinated security interests and pledges of assets/stock.
- Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in a $27,000,000 ESOP purchase transaction designed to permit the selling shareholders to eliminate capital gains taxes on their sale proceeds (a tax savings of more than $5.6Million) by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Advised the Trustee in connection with the contribution, reorganization and recapitalization of a licensed apparel manufacturer (specializing in the design, manufacture and sale of branded casual sportswear, formalwear, bridal wear and resort wear in owned retail stores and through department and specialty stores), and subsequent leveraged-ESOP transaction for the transfer of 30.0% of the Class B Convertible Preferred Stock of the company, including creation of the Trust and Plan, primary financing transactions ($12,700,000 term loan; $14,300,000 one-day bridge loan; and $27,000,000 internal ESOP loan), subsequent sale of $14,300,000 of Seller Subordinated Notes, extension of new credit facility, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of management incentive plan.
- Represented the Trustee (Corporate Fiduciary) in the recapitalization of a handbag and accessories manufacturer, in connection with a leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $90,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, Tranche B subordinated debt, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Corporate Fiduciary) in the role of successor trustee in the negotiation of third-party sale in 2005 of an apparel manufacturer to public company traded on Hong Kong Exchange for $135,000,000, subsequent to a leveraged-ESOP (Employee Stock Ownership Plan) transaction in 2001 for the transfer of $11,500,000 of Class B ESOP Convertible Preferred Stock of company. Net proceeds to the ESOP exceeded $22,600,000 after repayment of all acquisition debt.
- Represented the Trustee (Corporate Fiduciary) in a leveraged-ESOP (Employee Stock Ownership Plan) transaction involving the redemption of all of the issued and outstanding Common Stock of a semi-custom cabinet manufacturer (S-corporation), and concurrent purchase by the ESOP of all Common Stock for approximately $23,100,000 (representing approximately 44% of the fully-diluted equity post-transaction, after giving effect to the detachable warrants and management incentive plan), primary financing transactions (including cash contributions to the ESOP of $3,700,000 and $19,400,000 term loan), AAA distribution of $14,000,000, offering and issuance of Tranche B and Tranche C Junior Subordinated Notes with detachable warrants (to purchase approximately 36% of the fully-diluted equity post-transaction), approval of a management incentive plan (permitting awards of stock appreciation rights representing up to 20% of the fully-diluted equity post-transaction), and subordinated security interests and pledges of assets/stock.
- Represented the Trustee (Corporate Fiduciary) in the role of successor trustee in the negotiation of third-party sale in 2006 of an operator of home nursing and private duty nursing health care company for $15,000,000, subsequent to a leveraged-ESOP (Employee Stock Ownership Plan) transaction in 1990.
- Represented the Trustee (Corporate Fiduciary) in the role of successor trustee in the negotiation of third-party sale in 2006 of an independent provider of commercial security systems (including electronic security, access control, closed circuit television and fire systems) for $10,732,000, subsequent to a leveraged-ESOP (Employee Stock Ownership Plan) transaction in 2000.
- Represented the Trustee (Corporate Fiduciary) in the consolidation and reorganization of five real estate management companies, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $20,017,200 of Common Stock of the holding company for multiple operating entities, including creation of Trust and Plan, purchase of capital stock, primary financing transactions, offering and issuance of subordinated debt instruments, intercreditor relationships, and subordinated security interests and pledges of assets/stock.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of a designer/manufacturer of licensed-brands of junior and misses sportswear, women’s suits, and other apparel, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $20,000,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of a manufacturer of licensed-brands apparel, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $18,900,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of an architecture and engineering firm, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $13,600,000 of Class B ESOP Convertible Preferred Stock of a captive management company as required by professional service regulations, for a management buy-out.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of a footwear manufacturer, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $13,400,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Professional Fiduciary) in the a leveraged-ESOP (Employee Stock Ownership Plan) transaction for the purchase of all of the issued and outstanding Common Stock of a state-licensed contracting company that provides full-service boiler repair, service, sales, maintenance, and rentals, including amendments to the existing Trust and Plan, purchase of capital stock for $11,000,000 (representing approximately 74% of the fully-diluted equity post-transaction, after giving effect to the detachable warrants and management incentive plan), primary financing transactions (including cash contributions, $5,300,000 senior term loan, and $5,700,000 demand loan), sale/leaseback of commercial real estate, subsequent S-corporation election, offering and issuance of subordinated Series A Notes with detachable warrants (to purchase approximately 19% of the fully-diluted equity post-transaction), approval of a management incentive plan (permitting awards of stock appreciation rights representing up to 15% of the fully-diluted equity post-transaction), and subordinated security interests and pledges of assets/stock.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of a brass manufacturer and its affiliates, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $7,825,000 of Class B ESOP Convertible Preferred Stock of company stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Corporate Fiduciary) in the reorganization and recapitalization of a legal printing firm, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $5,500,000 of Class B ESOP Convertible Preferred Stock, including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Corporate Fiduciary headquartered in the Midwest) in the reorganization and recapitalization of a premier interior/exterior lighting and horticultural services firm, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction for the transfer of $5,400,000 of Class B ESOP Convertible Preferred Stock (49%), including creation of Trust and Plan, primary financing transactions, distribution of S-corporation AAA balances, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.
- Represented the Trustee (Special Corporate Fiduciary) in the analysis and consideration of an offer to sell all of the capital stock of a graphics and printing firm, wholly-owned by an S-corporation ESOP (Employee Stock Ownership Plan).
- Represented the Trustee (Special Corporate Fiduciary) in the analysis and consideration of an offer to sell all of the capital stock of a insurance company, wholly-owned by an S-corporation ESOP (Employee Stock Ownership Plan).
- Represented management team and private equity sponsor in connection with the proposed reorganization and acquisition of public healthcare company divisional operating assets and diagnostic facilities through a leveraged-ESOP (Employee Stock Ownership Plan) transaction involving S-corporation wholly-owned by ESOP for the benefit of employee-participants of the health system.
- Represented a nonprofit health system in connection with the proposed transfer of assets and reorganization of operating hospitals, technical and diagnostic facilities, long-term care facilities, and other assets in leveraged-ESOP (Employee Stock Ownership Plan) transactions involving multiple S-corporations wholly-owned by ESOPs for the benefit of employee-participants of the health system, including creation of Trusts and Plans, regulatory review, and financing transactions.
- Represented the company, a trade association management company, in the reorganization and recapitalization of the company, and subsequent leveraged-ESOP (Employee Stock Ownership Plan) transaction, including creation of Trust and Plan, primary financing transactions, debt subordination and intercreditor relationships, and subordinated security interests and pledges of assets and stock.