Todays Agenda I. The Ownership Transition II. What is an ESOP III. - - PDF document

▶
today s agenda
SMART_READER_LITE
LIVE PREVIEW

Todays Agenda I. The Ownership Transition II. What is an ESOP III. - - PDF document

Mar 10, 2024 451 likes •652 views

8/30/2016 ESOPs: What Paralegals Need to Know NFPA Annual Convention Burlington, VT October 20-23, 2016 Tabitha M. Croscut, Esq. Steiker, Greenapple & Croscut, P.C. Direct: (215) 508-7709 77 College Street Suite 2D Burlington,

slide-1
SLIDE 1

8/30/2016 1

Tabitha M. Croscut, Esq. Steiker, Greenapple & Croscut, P.C. Direct: (215) 508-7709 77 College Street • Suite 2D Burlington, VT 05401 tcroscut@esoplegal.com www.esoplegal.com

ESOPs: What Paralegals Need to Know NFPA Annual Convention Burlington, VT October 20-23, 2016

Today’s Agenda

  • I. The Ownership Transition
  • II. What is an ESOP
  • III. Why Choose an ESOP as a Transition Strategy?
  • IV. How Do ESOPs Work?
slide-2
SLIDE 2

8/30/2016 1

THE OWNERSHIP TRANSITION

 All businesses must be or will eventually be sold or transferred

  • Privately held companies have no ready market

 Sales or transfer approach should be based on shareholder goals

in the context of achievable alternatives

WHY CARE ABOUT ESOPS? PROBLEM OF LIQUIDITY AND SUCCESSION

slide-3
SLIDE 3

8/30/2016 1

 External Buyers

  • Strategic
  • Financial
  • IPO

 Internal Buyers

  • Family
  • Management
  • Partner (Redemptions & Buy‐Sells)
  • ESOP

 Liquidation

LIQUIDITY AND SUCCESSION: ALTERNATIVES

WHAT IS AN ESOP?

slide-4
SLIDE 4

8/30/2016 1

  • “Employee Stock Ownership Plan”
  • Qualified retirement plan under Internal Revenue Code
  • Regulated by US DOL and IRS
  • Company‐funded benefit — no employee contributions
  • Intended to be invested primarily in company stock
  • Only qualified retirement plan that can borrow money
  • Tax‐efficient and controlled means of selling stock
  • ESOP as a shareholder — employees do not have title to shares

WHY CHOOSE ESOP: WHAT IS IT?

 To Business Owners:

…a Buyer of Stock

 To Employees:

…a Company‐Funded Retirement Plan

 To Companies:

…a Corporate Finance Technique

WHAT IS AN ESOP?

slide-5
SLIDE 5

8/30/2016 1

Applicable in almost all industries — service, manufacturing, professional (engineering and architects)

ESOP EXISTENCE…

 Legacy  Employee concern (family)  Control / maintain day‐to‐day  Diversification / Liquidity  Avoid / Reduce Income Tax (Seller & Company)  Additional retirement plan for employees  Increase employee productivity / employee incentive  Not ready to golf / leave company  Value / purchase price certainty  No ownership transition alternatives – close the doors  Split the baby – division of assets for divorce  Retirement of founder/owner

WHY DO BUSINESS OWNERS USE ESOPS?

slide-6
SLIDE 6

8/30/2016 1

A Few Core ESOP Advantages and Disadvantages

Advantages  Tax efficient  Shareholder &/or Company directed process  Control over timing  Legacy Disadvantages  Complex  Regulated  Often involve Seller notes (e.g. 100% transfer)

WHAT LAWS GOVERN ESOPS?

slide-7
SLIDE 7

8/30/2016 1

Governing Laws & Documents

ESOP as a Retirement Plan  ERISA & Regulations  Internal Revenue Code & Regulations  Plan Document  Trust Agreement ESOP as a Shareholder  Company Articles  Company Bylaws  Buy‐Sell/Shareholder Agreement

HOW DO ESOP TRANSACTIONS WORK?

slide-8
SLIDE 8

8/30/2016 1

Bank Note & Collateral $$ Cash

Note & Pledge of Stock

$$ Cash 100% Company Stock

 Company ESOP Shareholder

Initial “C” Corporation ‐ Leveraged ESOP Transaction

Company ESOP

Company Stock Cash &

  • Sub. Note

w/Warrants

Shareholder

Cash

Initial “S” Corporation Leveraged ESOP Transaction

Bank

$$ Cash Note & Collateral

Cash & Sub. Note

Stock ~100% Stock Note & Pledge

  • f Stock
slide-9
SLIDE 9

8/30/2016 1

Company Bank and/or Shareholder ESOP

Release of Shares Pledged as Collateral and Share Allocations to Individual ESOP Accounts Loan Payments ($$$) Loan Payments ($$$)

ESOP Loan Repayment

Contributions or Dividends ($$$) Contributions or Dividends ($$$)

Contributions or Dividends ($$$) Loan Payments ($$$) Loan Payments ($$$)

TAX-DEFERRED LIQUIDITY TO SELLERS IN ESOP TRANSACTIONS

slide-10
SLIDE 10

8/30/2016 1

 Must be a C corporation  Reinvest in Qualified Replacement Property (QRP)  ESOP must own 30% of company  Minimum of 3‐year holding period  “Best” stock (voting)  15‐month reinvestment window of proceeds

IRC § 1042 ROLLOVER REQUIREMENTS FOR CAPITAL GAINS TAX DEFERRAL

THE ESOP AS A RETIREMENT PLAN

slide-11
SLIDE 11

8/30/2016 1

 Who can Participate in the ESOP?  1,000 hours and age 21 (outside limit)  Who can receive an “allocation” in the ESOP?  Employed on last day of PY/FY AND 1,000 hours

 Allocation Formula

  • In proportion to annual compensation [see next slide]
  • Also points formula optional (not safe harbor)

ESOP OPERATIONS: PARTICIPATION & ALLOCATIONS

ESOP Operations: Allocation Example

Shares purchased by ESOP 6,000 shares Allocation period 20 years W‐2 Pay Allocation Percentage Shares Allocated in 1st Year Employee #1 $25,000 23% 68.18 Employee #2 $35,000 32% 95.45 Employee #3 $50,000 45% 136.36 $110,000 100% 300.00

slide-12
SLIDE 12

8/30/2016 1

 What does an employee get if they terminate?

1. Vesting

  • 3 year cliff or 6 year graded (0%, 0%, 20%, 20%, etc.)
  • Non‐vested shares are forfeited

2. Timing of Distributions i‐ Year after death, disability or Normal Retirement Age ii‐ Sixth year after “other” termination 3. Form of Distribution

  • Cash or Company Stock (immediately redeemed)
  • Lump Sum or 5‐year annual installments

ESOP OPERATIONS POST‐TRANSACTION: VESTING & DISTRIBUTIONS

ONGOING ESOP ITEMS POST- TRANSACTION

slide-13
SLIDE 13

8/30/2016 1

 Annual appraisal update  Annual recordkeeping and administration  Repurchase obligations  Communications training and education  Legal compliance  Audit for larger plans

ONGOING ESOP ITEMS POST‐TRANSACTION

  • If the company is profitable and growing
  • If the company has debt capacity it can dedicate to funding an

ESOP over and above other reinvestment (not overleveraged)

  • If the company can finance its own growth
  • If there are enough employees and thus payroll over which the

ESOP costs can be spread

  • If the blend of share allocations and value trajectory results in an

acceptable/appropriate stream of benefits

  • If the company could benefit from a broad‐based ownership plan
  • If the company has a strong management team

WHY CHOOSE ESOP: WHAT MAKES A GOOD ESOP COMPANY?

slide-14
SLIDE 14

8/30/2016 1

Steps in an ESOP Transaction

  • Feasibility Study (Transaction Analysis)
  • Financing
  • Appraisal
  • Estate Planning
  • Plan Design
  • Legal Documentation
  • Closing
  • IRS Determination Letter on ESOP

Who might be involved?

  • ESOP Trustee – independent/external
  • Financial advisor to seller(s), company, ESOP Trustee
  • Valuation
  • Cash flow analysis
  • Proceeds analysis (cash, principal, interest, warrants, etc…)
  • Banking Team
  • Legal representation for seller(s), Company, ESOP Trustee
  • Corporate, ESOP, Estate Planning, etc…
  • ESOP Third Party Administrator (TPA)
  • Accounting Firm (analysis / audit)
  • Investment Banker
  • Insurance Broker
slide-15
SLIDE 15

8/30/2016 1

PRACTICAL ESOP ISSUES

  • Qualified Domestic Relation Orders (QDROs)
  • What is it?
  • What’s required?
  • What’s best practice procedure?
  • Key terms

‐ Alternate Payee

  • Liquidity for splitting Assets

FAMILY LAW & ESOPS

slide-16
SLIDE 16

8/30/2016 1

  • Value Implications
  • 1042 Opportunity
  • Warrants – Dynasty Trust
  • Equalize

ESTATE PLANNING & ESOPS

  • ESOP as a shareholder
  • Sale transactions – restrictions on ESP representatives and indemnity

‐ FMV State ‐ Fairness Opinion

  • Other Non‐ESOP shareholders
  • Pass‐through voting – merger, sale of assets, recap, consolidation, and

dissolution (not sale of stock)

  • Unallocated/Suspense Shares
  • C‐Corp Bylaws/Article Restriction to permit cash on to distributions
  • Releases – ESOPS cannot release “p” claims

CORPORATE LAW & ESOPS

slide-17
SLIDE 17

8/30/2016 1

  • Collateral
  • Limitations on security
  • Covenant for X – ESOP add back
  • Cannot get ESOP Valuation

BANKING LAW & ESOPS

  • Esoplegal.com/SESAdvisors.com
  • NCEO.org
  • Esopassociation.org

RESOURCES

slide-18
SLIDE 18

8/30/2016 1

QUESTIONS

Tabitha Croscut, Esq.

Tabitha is the managing shareholder of Steiker, Greenapple & Croscut, P.C., a national law firm with a focus on Employee Stock Ownership Plans (ESOPs) as succession and employee compensation strategies. In addition to counseling clients regarding transactional, compliance and fiduciary issues with respect to their ESOPs, she has represented companies, sellers and internal and external trustees in ESOP transactions ranging from under a million dollars to over four hundred million dollars. She is a frequent speaker at ESOP conferences nationwide and presents regularly on how ESOPs can be an effective exit or transition planning tool for owners of closely held businesses. Tabitha serves as the President and a Director for the Vermont Employee Ownership Center (VEOC), is an active member of The ESOP Association and the National Center for Employee Ownership (NCEO), and serves on the Board of Trustees for the Employee Ownership Foundation. Since 1987, SG&C attorneys have been involved in hundreds of ESOP transactions nationwide, providing legal advice on employee ownership matters for corporations, business owners, lenders and ESOP fiduciaries. Visit our website at: www.esoplegal.com Managing Shareholder Steiker, Greenapple & Croscut P.C.

Contact Information: Phone: 215-508-1500 x214 E-mail Address: TCroscut@esoplegal.com Office Addresses: 77 College Street Suite 2D Burlington, VT 05401 360 Route 101, Suite 1 Bedford, NH 03110