Buying or Selling an ESOP-Owned Company: How to Execute a Successful Transaction. The presentation includes a recent case study of the sale of a large ESOP-owned company, discussion of intricacies involved related to an ESOP, and how to execute a successful transaction.

1. “Ins & Outs” of Buying and Selling
an ESOP Company
AM&AA 2015 Winter Conference
Las Vegas, Nevada
January 29, 2015
David
B.
Solomon
Levenfeld
Pearlstein,
LLC
2
N.
LaSalle
Street,
Suite
1300
Chicago,
Illinois
60602
P:
(312)
476-­‐7526
Email:
dsolomon@lplegal.com
Alberto
Toribio
del
Pilar
ButcherJoseph
&
Co.
101
S.
Hanley
Rd.,
Suite
1450
St.
Louis,
MO
63105
P:
(314)
558-­‐5116
Email:
alberto.delpilar@butcherjoseph.com
Michael
E.
Zeller
Moore
&
Van
Allen
PLLC
100
North
Tryon
Street,
Suite
4700
CharloZe,
NC
28202
P:
(704)
331-­‐1064
Email:
mikezeller@mvalaw.com
ALLIANCE OF MERGER & ACQUISITION ADVISORS®

2. Representative List of ESOP Owned Companies
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3. Why ESOP Companies Get Sold
§ Changing risk profile
§ Market conditions
§ Liquidity needs
§ Non-ESOP shareholders want an exit without selling additional
shares to the ESOP
§ Unable to re-pay debt from operating cash flows
§ Repurchase obligation issues
§ Receive an unsolicited offer
§ Need for a new capital structure
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4. Parties Involved in the Sale of an ESOP Company
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5. Issues for an Acquirer of an ESOP-Owned Company
§ Acquirer needs to be educated as to the peculiarities of ESOP
transactions
§ There is a difference between what is customary in non-ESOP
M&A transactions and what is “allowable” under ERISA and
customary in ESOP M&A transactions
§ Acquirer will have to conduct more extensive due diligence and
rely on that due diligence as recourse usually limited to an escrow
§ Valuation/fiduciary/administrative issues relating to the ESOP will
also have to be negotiated
§ What happens with the money in the ESOP from the transaction
proceeds?
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6. Optimal ESOP Company Sale Process
§ Board of Directors Develops Policies and Procedures for Sale
Process/Hires Advisors
§ Senior Management Receives Offer/Confirms Offer is “Bona Fide”
§ ESOP Trustee and its Advisors (and in some cases ESOP
Participants) Analyze the Offer
§ Board of Directors Reviews Offer/Recommends Approval or
Disapproval
§ Buyer Due Diligence, Negotiation and Documentation of Transaction
§ Buyer, Company and ESOP Trustee Address Post-Closing Issues
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7. Board of Director Policies and Procedures Regarding the
Sale of an ESOP Company
§ Even if the Board desires not to sell an ESOP Company, there should
be a policy developed to memorialize the objectives for maintaining
ESOP ownership
§ The Board should also develop policies and procedures to address
how to handle unsolicited offers to buy the Company
§ Some offers are “too good to refuse”
§ All offers should be contextualized with the status quo and any viable
alternatives that provide liquidity to ESOP participants
§ If the Company is in the process of being sold, the Board should hire
its own independent advisors
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8. Analysis of Offers by Senior Management
§ Management should treat “real” offers seriously but no duty to inform
Board/ESOP Trustee if offer is not “bona-fide”
§ Offers to buy the Company are “bona-fide” if:
§ Proposed consideration is nominally adequate
§ Other proposed deal terms are fair and reasonable and treat all
shareholders equitably
§ Proposed purchaser has the financial ability to pay the proposed
purchase price
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9. Fiduciary Standards Applicable to Board Members in
Evaluating the Sale of the Company
§ Board subject to “Business Judgment Rule” and should take into
account:
§ Value to shareholders
§ Company culture and independence
§ Employees, employment, motivation, productivity
§ Alternative purchasers
§ Continuity of business
§ Whether purchase price is no less than fair cash value under state
corporate law
§ If the Company/Response Team decides to negotiate a transaction, is
an auction required? Is exclusivity permitted?
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10. Fiduciary Standards Applicable to ESOP Trustee in
Evaluating the Sale of the Company
§ “Exclusive Benefit Rule” requires ESOP Trustee to optimize value for
all plan participants (short vs. long-term)
§ “Kroy” standards for trustees:
§ Good faith
§ Diligent investigation
§ Independent judgment
§ Prudent expert
§ Adequate consideration rules
§ IRS Ruling 59-60
§ ERISA Section 3(18)B and proposed Reg 29 CFR 2510.3-18(b)
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11. Conflicts Between Board and ESOP Trustee Standards for
Evaluating Offers to buy the Company
§ Board of Directors:
§ Duty of good faith and reasonable standard of care (protection
under the business judgment rule)
§ ESOP Trustees/ERISA Fiduciaries:
§ Duty of good faith and a higher standard of care (no protection
under the business judgment rule)
§ Potential conflicts if board members also serve as ESOP Trustees
(Donovan v. Bierwirth and Howard v. Shay)
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12. Issues for ESOP Trustees In Evaluating the Offer
§ In evaluating an offer to sell the Company, the ESOP Trustee should
consider the following questions:
§ Does the offer equate to or exceed fair market value? (This is
Absolute Fairness)
§ Would the ESOP receive its “fair share” in the transaction relative
to other parties to the transaction? (This is Relative Fairness)
§ Was a thorough process used to reach a proposed transaction?
§ Whether the buyer is the best deal partner?
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13. Evaluating the Offer – Absolute Fairness
§ Fairness Opinion
§ Financial Point of View
§ Valuation Methods
§ ESOP-related expenses
§ Tax Benefits
§ Control premium/synergies
§ Marketability
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14. Is the Trustee Required to Sell if the Offering Price is
Greater than the Appraised Value of the Company?
§ According to a Joint DOL/IRS statement, an ESOP Trustee is NOT
obligated to sell stock in an ESOP solely because the price is at a
premium to fair market value
§ Other factors to consider:
§ Look at long-term prospects of target company and weigh an offer
against the underlying intrinsic value of the company and the
likelihood of that being realized by current management or by a
subsequent offer
§ S Corporation benefits must be considered (tax shield)
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15. Evaluating the Offer – Relative Fairness
§ ESOP treatment relative to other parties:
§ Employee contracts
§ Amount
§ Length
§ Additional incentive plans to keep executives in place post-
transaction
§ Payment to the executives for bringing about the sale
§ Other “side” deals
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16. Evaluating the Offer – Process
§ Did the Company just react?
§ Did the Board hire an investment banker?
§ Was an auction process used?
§ Was the contract with the investment banker structured to ensure the
best deal possible for the Company?
§ Are the Company decision makers motivated to get the best deal
possible or just to get a deal done?
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17. Evaluating the Offer – What About the Buyer?
§ Does the Buyer have the financial strength to carry through the
transaction, including honoring any earn outs?
§ Has the Buyer done other acquisitions and how does this one
compare?
§ What synergies is the Buyer likely to get? Is any of that shared with
the Target?
§ Where is the Buyer in its business cycle? Could it make a better offer
at a different time?
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18. Other Issues for the ESOP Trustee in a Sale Transaction
§ Can the ESOP Trustee agree to an earn out?
§ Can escrowed funds/earn outs be considered a part of the purchase
price for purposes of determining “Adequate Consideration” and
“Fairness”?
§ Can the Trustee take into consideration any other non-financial factors
in evaluating the proposed transaction?
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19. Administrative Issues in Connection with the Sale of an
ESOP Company
§ Participant voting requirements
§ Repayment of ESOP Debt/Remaining shares in suspense account
§ Plan Termination/Disposition of Plan Assets/Full Vesting
§ Other qualified plans and protected benefits
§ Triggering change in control provisions of deferred compensation
plans
§ Distribution of plan assets
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20. ESOP Participant Pass-Through Voting Requirements
§ ESOP participants only entitled to vote shares allocated to their ESOP
accounts for a merger/sale of assets
§ Stock sale transactions/tender offers do not require a pass-through
vote (unless required by plan document)
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21. What is the ESOP Participant Approval Process for an Asset
Sale or Merger?
§ Provide Disclosure Statement containing:
§ Summary of Purchase Agreement terms/related party transactions
§ Plain language explanation of transaction
§ Comply with statutory timing of pass through vote/appraisal rights
§ Meeting with participants (optional)
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22. Issues Relating to Outstanding ESOP Loan upon the Sale of
an ESOP Company
§ Outstanding ESOP-related debt will have an impact on the ESOP’s
return from the transaction
§ The obligation to repay the ESOP’s outstanding debt should be
negotiated as it may accrue to either the ESOP or the plan
sponsor/other shareholders.
§ The ESOP – related debt affects the unallocated shares of stock
held by the plan.
§ ESOP Trustee may be able to obtain a final company contribution and/
or dividend payment to pay down the remaining ESOP loan (but
issues under Section 415 may arise if the maximum limit is reached
because of prior contributions)
§ Will ESOP shares be sold for cash or shares of the buyer?
§ Participant distribution and rollover issues
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23. Alternatives for the Repayment of ESOP Loans/Disposition
of Unallocated Shares
§ Surrender of unallocated shares at deal price in exchange for
cancellation of debt and allocate proceeds from remaining unallocated
shares to ESOP participants
§ May also need to negotiate “replacement” benefits if using
unallocated share proceeds to repay ESOP debt
§ Forgiveness of all or part of debt and allocation of shares to
participants
§ Substitution of buyer stock for company stock and continuation of
ESOP
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24. Options for ESOP Post-Transaction
§ Merge ESOP into buyer’s plan
§ Terminate ESOP and distribute assets to participants (a potential risk
for the Buyer)
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25. Procedural Considerations for ESOP Plan Termination
§ Prepare a Board resolution indicating that the Company is terminating
the plan and specifying the termination date for doing so (will trigger
100% vesting)
§ Decide whether to file for an application for an IRS favorable
determination letter
§ Review the ESOP document to determine if any amendment is
needed prior to termination. Consider such things as:
§ Recent legislative changes requiring plan amendment
§ Plan termination date and freezing plan entry
§ Establish procedures for making final allocations
§ Hours and employment on allocation date requirement
§ Compensation to be used for the final allocation
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26. Considerations for Distribution of Plan Assets upon ESOP
Plan Termination
§ Any changes needed to timing, method or form?
§ Stock distributions vs. cash distributions?
§ Can a right to demand a stock distribution be eliminated?
§ Wait for favorable determination letter
§ If transferring assets to Buyer’s plan, that plan may need to be amended to accept a
transfer of assets from the terminated plan for participants who do not consent to a
distribution and the ESOP may have to be amended to allow a transfer to the other
qualified plan for participants who do not consent to a distribution.
§ Any distributions currently in process will need special attention
§ Will they be paid based on the most recent valuation or will they get paid based on
the sale price of the company?
§ What should be done regarding distributions payable after a possible sale is known
and before the transaction is completed?
§ Regarding force out distributions?
§ Regarding participant requested distributions?
§ Where an escrow is involved, distribution to ESOP participants may involve cash
payments and “scrip” payments to participants evidencing their proportional shares in
the escrow account
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27. Additional Administration Considerations upon the Sale of an
ESOP Company
§ Search for missing participants
§ Prepare distribution election forms
§ Prepare final ESOP accounting
§ Make distributions
§ Generally required within one year of the plan’s termination date. May
be delayed if waiting on a timely filed determination letter request
§ If any participants do not consent to the distribution,
§ Rollover to IRA?
§ Transfer to another plan maintained by the employer?
§ File final Form 5500 annual report and send final Summary Annual
Report to participants
§ Generally due the last day of the 7th month following the date of
final distribution (unless extension is granted)
§ Issue final Forms 1099R
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28. Concluding Observations
§ Every ESOP Company should have a policy to address the potential
sale of the Company
§ Avoid conflicts of interest between corporate fiduciaries (Board,
Officers, etc.) and ESOP fiduciaries
§ Hire experienced advisors to handle complicated legal/financial/
administrative issues involved in the sale of an ESOP Company
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29. Disclaimer
These presentation materials and the presentation itself are for the attendees of the AM&AA Winter Conference 2015 and
intended to encourage thought and discussion and to provide seminar attendees with useful ideas with respect to the use
of an ESOP as an investment strategy, exit structure or a tool to enhance valuation and execution. The materials and the
comments of Levenfeld Pearlstein, LLC and Moore & Van Allen, PLLC attorneys do not constitute, and should not be
treated as, legal or tax advice regarding the use of any particular estate, tax or other planning technique or suggestion, or
any of the tax, legal or other consequences associated with them. The speakers, ButcherJoseph & Co., Levenfeld
Pearlstein, LLC, and Moore & Van Allen, PLLC assume no responsibility for any individual or entity’s reliance on the verbal
or written information presented during or in conjunction with the seminar, and pursuant to Circular 230 and the
regulations promulgated by the U.S. Treasury, the information is not intended or written to be used, and cannot be used,
by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service. Each
seminar attendee should independently verify all information contained in the materials and statements made during the
seminar presentations before applying them to a particular client situation, and should independently determine the tax,
legal and other consequences of using any particular technique or suggestion before recommending or implementing the
same on a client or attendee’s own behalf.
© Materials copyrighted by ButcherJoseph & Co., Levenfeld Pearlstein, LLC, and Moore & Van Allen, PLLC
All rights reserved
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