Practical and Creative Counsel Throughout the Life Cycle of an ESOP
Employee stock ownership plans (ESOPs) feature a variety of benefits for business owners, their companies and their employees. They allow employees to own part or all of a company through retirement accounts in a tax-exempt trust and permit a company that is 100-percent owned by its ESOP not to pay any federal and most state income taxes. Research of the more than 6,600 ESOPs in the U.S. shows that companies which cultivate an ownership-culture are more productive and profitable, grow faster, have less turnover, and generate more wealth for employees. The ESOP model also presents a number of challenges for employers, such as navigating thorny Department of Labor (DOL) and Internal Revenue Service (IRS) requirements and aggressive oversight by these federal agencies, funding the payment of ESOP benefits, and adhering to the unique terms of ESOP plan documents.
Saul Ewing’s ESOP attorneys help closely held companies—including S and C corporations, whether as stand-alone corporations or multi-level holding company structures—operate efficiently within the legal and regulatory parameters while they strive to grow and generate profits. With a deep understanding of the technical rules in the Internal Revenue Code and IRS regulations as well as of ERISA’s fiduciary requirements enforced by the DOL, our attorneys regularly advise clients on matters in the following areas:
- Plan design and establishment, including feasibility studies and preparation of ESOP plan documents in compliance with DOL rules and IRS qualification requirements.
- Ongoing administration and compliance, including modifications in plan design and operations to help clients sustain their ESOPs as conditions change; management of repurchase obligations; correction of operational errors; and advisement of shareholders on how to comply with Section 1042 requirements for deferring taxes on capital gains realized in a sale to an ESOP.
- Transactions, including management of ESOP transactions as counsel for a company installing an ESOP, acquiring another company, or accessing equity or debt capital. We also represent trustees when an ESOP trust is buying or selling stock.
- Federal investigations, including the representation of employers or fiduciaries in DOL investigations and IRS audits.
Providing practical counsel with creative problem-solving advice, our ESOP team includes attorneys with extensive backgrounds in plan administration and employee benefits law. As part of a full-service law firm, the team regularly coordinates with attorneys in complementary areas, including mergers and acquisitions, tax, environmental, intellectual property, labor and employment, and debt financing, to help ensure that our clients receive efficient and streamlined support to address any issues that might arise during or after an ESOP transaction.
Saul Ewing attorneys advised on these select ESOP representations:
(*prior results do not guarantee a similar outcome)
ESOP Formations and Stock Purchases
- An e-commerce arts and crafts business with 25 ESOP participants in successive leveraged transactions to acquire all remaining shares from the founder’s family.
- A technology company in the transition to a 100 percent employee-owned company amid rumors of the company being acquired by a competitor.
- An engineering firm in the sale to an ESOP.
- An electrical contractor in the sale to an ESOP.
- An online marketing company in a transition to 100 percent employee ownership.
- An ESOP trustee in the sale of a manufacturing company to an ESOP.
- An ESOP trustee in the transition of a furniture company to 100 percent employee ownership.
- A construction company in the sale of a 49% ownership interest to an ESOP.
Sales of ESOP Companies *
- The trustee of a 300-participant ESOP in the sale of the 90 percent ESOP-owned HVAC and plumbing wholesale supply to a strategic buyer.
- An employee-owned regional media business in the sale of the company to CBS.
- A 100 percent ESOP company in the freight transportation and logistics industry in connection with a competitive sales process, resulting in the purchase of the company at a substantial premium.
- A 100 percent ESOP company in the industrial gas industry in a sale to a strategic buyer.
- A majority ESOP-owned financial services company in sale to private equity.
Acquisitions by ESOP Companies
- An electrical wholesale distribution company with 2,550 ESOP participants in a stock-for-stock acquisition of another leveraged 100 percent ESOP-owned competitor.
- An employee-owned optical company in a cash purchase of another ESOP company and merger of ESOPs, allowing the cash outlay to also serve as funding for repurchase obligations.
- A wholesale distributor with 1,500 employee-owners in a transaction to expand its territory involving three ESOPs and enabling the target company’s individual owners to elect deferral of capital gains taxes under Section 1042.
- A music and performance equipment manufacturer in the purchase of an ESOP company and integration of operations, creating a market-leading platform in sound, stage, and set solutions for the music performance industry.
- A Minnesota-based construction management, consulting and real estate development company, in the $1.5 million acquisition of an Arizona-based commercial construction and general contractor company, involving an earnout, a holdback and an ESOP-owned seller.
- An employee-owned wholesale distribution company in the acquisition of a family-owned produce distributor, including stock and related real estate, with a $15 million purchase price plus a multi-year earnout.