Can an ESOP Company be Sold?

There are times when an employee-owned company may need to consider selling the business. There might be an attractive offer from a competitor or a private equity firm, or perhaps the business leaders see an opportunity that needs to be considered.

So, can a company that is operating with an Employee Stock Ownership Plan (ESOP) be sold? The short answer is yes, and there may even be ESOP tax benefits to the seller, but it must follow specific requirements when doing so. Let’s go over the specifics in today’s article. 

Selling an ESOP Company Requires Board and Trustee Approval

The decision to sell an ESOP company requires careful coordination between the Board of Directors and the ESOP Trustee. While the Board typically leads initial negotiations, the ESOP Trustee holds ultimate approval authority for any sale. Early and frequent communication between these parties is essential throughout the process.

The Board must evaluate purchase offers with its obligation to maximize shareholder value in mind, while the ESOP Trustee must ensure fair value for plan participants. This dual oversight structure helps protect participant interests, as the ESOP Trustee often has the authority to elect and remove Directors. At the same time, the Board maintains the power to appoint and remove the Trustee.

Board Considerations in Selling ESOP-Owned Companies

When evaluating a purchase offer, the Board must carefully assess several business factors:

• Proposed structure (asset vs. stock sale)
• Transaction timing
• Total purchase price
• Buyer's credibility and ability to perform
• Specific terms and conditions
• Comparison to alternatives

Beyond these technical aspects, the Board should consider:

• Whether continuing operations would better serve shareholders
• Strategic timing of the sale
• Potential for higher offers from other buyers
• Minimum threshold for considering offers
• "Walk away" price parameters

These discussions should be thoroughly documented, as the ESOP Trustee may review the Board's analysis and deliberations. If both the Board and the Trustee support pursuing the offer, negotiations with the buyer can commence.

Stock Sales Vs. Asset Sales

ESOP companies can be sold through two primary structures:

Stock Sales involve a process where decision authority rests primarily with the Trustee and other shareholders. This approach is generally simpler than asset sales and may offer specific tax advantages depending on how the transaction is structured. With a stock sale, the ESOP Trustee can make decisions without requiring direct participant input, though they must still fulfill their fiduciary duties to ensure fair value for participants.

Asset Sales follow a different path, where the company itself negotiates the sale terms. This structure requires additional layers of approval, including shareholder authorization based on state-specific regulations. 

Importantly, asset sales necessitate ESOP participant pass-through voting under IRS rules. Before any vote, participants must receive comprehensive transaction information, including detailed financial data, timing expectations, and projected distribution amounts. The company must provide a descriptive memorandum outlining all pertinent details to help participants make informed decisions about the proposed sale.

The ESOP Trustee’s Obligations During a Sale

The Trustee's primary responsibility is ensuring the sale serves participants' best interests while adhering to the ESOP plan document. To fulfill this duty, the Trustee must obtain an independent stock valuation and secure a fairness opinion regarding both the price and terms of the proposed transaction. 

Often, the Trustee will engage additional financial advisors and legal counsel to provide comprehensive guidance throughout the process. They must carefully review the Board's analysis and deliberations to consider all factors affecting participant interests properly. These requirements apply to both stock and asset sales, creating a framework that supports the Trustee's decision-making process and protects participant interests.

Winding Down the ESOP After the Deal Closes

The post-sale process varies significantly depending on the transaction type. 

In a stock sale, the ESOP Trust receives cash proceeds directly, and participants become immediately 100% vested in their accounts. Distributions are typically made as lump sums, and while annual valuations are no longer required, Form 5500 filings must continue until the final distribution is complete.

Asset sales follow a different path, where the company receives the proceeds initially. In most cases, the company then dissolves and distributes proceeds to shareholders, including the ESOP Trust. The Trust must maintain the stock until final liquidation occurs, requiring continued valuations throughout this period. The dissolution process may need additional shareholder approval, and all participants become fully vested upon ESOP termination.

In both scenarios, the complete process typically takes about two years to complete. During this time, ongoing administration, documentation, and regulatory compliance must be maintained until all assets are distributed and expenses paid. The company must demonstrate good faith efforts to locate all participants and properly handle any unclaimed benefits before the ESOP can be fully terminated.

Aegis Trust is Here to Help

Facilitating an ESOP sale is possible, and it may be beneficial to plan participants. After all, a purchase offer indicates that the business is viewed as a success. Employees should take pride in that and be given the option of benefiting from it! If you have any questions about forming or administering an ESOP, get in touch.