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 6,700 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
- A wholesale food distributor in the establishment of an ESOP and the purchase of all outstanding stock from two owners in two stages.
- A technology consulting and sales company in the purchase of 100 percent of the company’s stock from two owners, one of whom stayed on as president of the company.
- A care provider for persons with disabilities and mental illness in the transition from four owners to a 100 percent ESOP-owned S corporation.
- An electromechanical device engineering and manufacturing company in the buyout of a retiring minority shareholder using an ESOP.
- A lending bank in a new ESOP’s purchase of stock in a 140-employee trucking company.
- An automobile dealership in the creation of an ESOP owning a 49 percent equity interest.
- A family-owned livestock feed manufacturer in the formation of a 100 percent S corporation ESOP.
- An ESOP trustee in a newly formed ESOP’s purchase of a 75 percent stake in a financial services firm.
- An electrical contractor with 900 ESOP participants in a transaction to buy out four shareholders and achieve 100 percent employee ownership.
- 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.
Sales of ESOP Companies *
- The seller in connection with the sale of an ESOP-owned company providing professional services in support of public health research primarily to federal government agencies.
- 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.
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.
DOL Investigations *
- An employer and its board of directors in a DOL challenge to the valuation used in a second-stage ESOP transaction, which included securing insurance coverage for all of the client’s legal fees, successfully refuting the DOL’s valuation theories, and avoiding litigation with no liability or sanctions against the client.
- A company in a dispute with the DOL about the timing of a dividend payment to the ESOP, where the DOL was persuaded to resolve the matter with a payment of lost earnings computed at 0.5 percent.
- An ESOP sponsor and its board of directors in the successful defense of a complex transaction involving multiple ESOPs, which was settled without any penalties or fiduciary liability.