Legal Blog

M & A Nuggets: ESOP Owned Seller

esopAs purchaser, you may come across a target seller that is owned in whole or in part by an employee stock ownership plan, or ESOP.  An ESOP is a type of retirement plan pursuant to which the employees of a company indirectly own the shares of stock in the company. The shares of stock are held in trust by the trustees of the ESOP.  When negotiating with an ESOP owned company, caution must be exercised and additional steps that do not exist with a conventional purchase must be taken.  The law grants companies that have ESOPs certain tax benefits.  As a quid pro quo to those tax benefits, the laws are designed to provide protection to the employees.  One of the major protections provided is that the shares of stock owned by the ESOP cannot be sold for less than adequate consideration.  To satisfy this rule, an independent trustee should be appointed and an independent appraiser should be engaged to opine as to whether the purposed purchase price is adequate consideration.  A failure to follow these steps which results in less than adequate consideration being paid can have repercussions on not only the seller but also the purchaser.  This is often the reason why a purchaser’s lender, if financing the purchase price, will insist that these steps be followed.

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Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businessesstructuring ownership agreements, and advising companies in financial distress






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