To say that it was cold is a serious understatement. On January 6th the temperature in Des Moines fell to a minus 12 degrees Fahrenheit. The wind chill was more than forty degrees below zero. Schools closed and people hunkered down with a roaring fire and hot chocolate (and made disparaging comments about people in warm climates posting pictures and comments on Facebook).
It hadn’t been this cold since 1996 and it got me to thinking. I feel warmer climates calling to me in retirement. Given my age, if we go another 18 years before it gets this cold again this may be the coldest day of the rest of my life.
Although that made me feel slightly better (but not any warmer) I realize that this is far from a certainty. I may work longer than I expect. Our kids may decide to settle down in the Midwest and we would want to be close to them. Tax laws may change. As summarized succinctly by Robert Burns, “the best laid plans of mice and men often go astray.”
Predicting the weather is about as easy as predicting future business prospects. This lack of certainty leads some business owners to dismiss Employee Stock Ownership Plans (ESOPs) as part of their succession plans. After all, many believe that once an ESOP is in place it cannot be eliminated. Nothing could be farther from the truth.
It may be helpful to illustrate this by way of example. Assume the following:
- On January 1, 2000 ABC had a fair market value of $10 million.
- The owner sold 40% of the company to an ESOP on that date.
- The loan that was used to acquire the shares by the ESOP has been paid in full.
- On January 1, 2014 the company receives an unsolicited offer of $15 million.
- Fair market value as of 1/1/14 is $11 million.
- The owner of the 60% of the stock not owned by the ESOP wants to sell to the corporate bidder through a merger.
The board of directors reviews the offer and if it is deemed to be bonafide presents it to the shareholders for a vote. Although the trustee votes the shares on behalf of the participants, there are instances where pass through voting applies. The merger sale of the company is one of those instances. The trustee seeks the votes of the participants and uses that input in their decision to support or object to the sale.
Regardless of the ESOP vote, the other owner has a majority of the stock and will ultimately decide the issue. Assuming the sale goes through, the ESOP will typically be terminated and plan participants will benefit from the above market price paid for the company.
This is obviously situation specific, but it does highlight that having an ESOP does not necessarily limit the future options for the company. Because individual situations can differ significantly you should consult with your legal advisors to better understand what this means to your situation.
It doesn’t have to be cold and it doesn’t have to be limiting. Understanding your options can help you understand how an ESOP can fit into your ownership structure.
In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter – @jlripperger.
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