Employee Stock Ownership Plan ("ESOP")
An ESOP is a qualified plan designed
to provide employees with ownership interests in their employer
by investing primarily in the employer’s stock.
How Does An ESOP Work?
In an ESOP, the company sets up a special
trust and then either contributes to that trust cash to buy
stock from existing owners or shares of its own stock. Stock
held in trust is then allocated to the individual accounts
of employee participants. In general, the number of shares
each employee receives is based on the ratio of his or her
salary to the total amount of salaries of the employees in
the ESOP. Employees acquire a gradually increasing right to
the stock in their accounts as they accumulate seniority,
a process known as “vesting”. When employees receive their
shares (usually when they leave the company or retire) they
can hold onto the shares, sell them to another buyer (but
the company has a right of first refusal), or require the
company to repurchase them at fair market value.
What Are The Benefits Of An ESOP?
ESOP’s have several uses, including:
• Providing an employee benefit plan
• Creating a market for stock in a
closely held corporation
• Integrating employees into the company
to enhance their commitment
• Allowing the company to repay ESOP
debt with pretax dollars
• Allowing individual shareholders
to defer gain on the sale of shares to an ESOP
• Enabling the company to borrow money
less expensively
ESOP’S As Financial Vehicles
Leveraging an ESOP is a useful corporate
financial tool. An ESOP is permitted to borrow money from
a lender to purchase stock directly from the company. The
shares generally are used as collateral for the loan. The
company makes annual, deductible cash contributions to the
ESOP trust in amounts sufficient to
repay the loan. As the loan is repaid, a proportionate number
of the shares are released to participants’ accounts. The
effect of this is that loan proceeds become available for
general corporate use and shares of stock are transferred
to the ESOP trust. The company can then use the proceeds to
expand, acquire a target company, buy out another owner or
refinance existing debt.
Is An ESOP Right For Your Company?
If you are considering an ESOP for
your company, you should contact one of our attorneys to discuss
whether an ESOP can fulfill your company’s objectives.
