There are times when an ESOP company may need to consider selling the business. Perhaps it is an attractive offer from a competitor or a private equity firm. Perhaps the ESOP business leaders see an opportunity to sell that they were previously unaware of and feel it needs to be considered.
The question arises, can an ESOP company be sold? The short answer is yes, an employee-owned ESOP company can be sold, but it must follow specific requirements when doing so.
Selling an ESOP Company Requires Board and Trustee Approval
First things first, as an ESOP company the founding business owner does not have the right to make the ‘sell or don’t sell’ decision on their own. Any discussions about selling the company must take place at the Board level and must involve the ESOP Trustee.
The Board will need to consider the purchase offer carefully, keeping in mind their obligation to maximize the value of the company on behalf of shareholders. As the fiduciary for the ESOP, the ESOP Trustee will need to ensure the offer is of fair value to plan participants.
The ESOP Board and the ESOP Trustee have oversight of each other. The ESOP Trustee often has the responsibility of elected and removing Directors while the Board of Directors usually has the power to appoint and/or remove the Trustee. This helps ensure both sides act in the best interests of plan participants.
Board Considerations in Selling an ESOP Owned Company
When evaluating a purchase offer, the Board should consider several business points. These include:
Proposed structure of the sale – is it an asset sale or stock sale?
Timing of the sale.
The total price offered.
The buyer’s ability to perform.
Specific terms and conditions of the offer.
How the offer compares to alternatives.
Beyond the business points, the Board will need to consider how a sale will affect shareholders. They should consider:
Whether or not it would be better for shareholders to continue operating the company.
Is it the right time to sell?
Are there other buyers interested who might make a better offer?
What is the threshold at which offers will be considered?
What is the “walk away price” for offers?
These discussions should take place at a Board meeting with minutes and notes taken as the ESOP Trustee may want to see the analysis and deliberations that went into making the decision. If the offer survives the analysis by the Board and the ESOP Trustee, negotiations with the buyer can begin.
Stock Sales Vs. Asset Sales
There are two ways of selling an ESOP owned company: as a stock sale or as an asset sale.
If the sale is structured as a stock sale, the Trustee and other shareholders will ultimately decide whether or not to sell the shares.
If it is an asset sale, the company is allowed to negotiate the sale, but the Board might need shareholder approval depending on the state in which the business is located and will need ESOP participant pass-through voting approval under IRS rules. Ultimately, the question of whether or not to sell the ESOP, comes down to how participants vote.
The ESOP Trustee’s Obligations
The ESOP Trustee’s first role in a company sale situation is to ensure the sale would be in participants’ best interests. The Trustee must also ensure the sale follows the ESOP plan document.
In order to comply with these fiduciary duties, the Trustee will need to hire an independent appraiser to provide a valuation of the stock and to issue a fairness opinion. The valuation will be compared to the purchase offer to ensure the price offered is no less than fair market value. The fairness opinion will state that the price on offer and the terms of the deal are fair to the ESOP and its’ participants. These two documents support the Trustee in their decision on whether or not to support the sale and are required in both stock sales and asset sales.
The Trustee may also hire an independent financial adviser and legal counsel to assist them in the decision-making process. These professionals will examine the specific terms of the deal to ensure they are fair to the ESOP Trust and to plan participants.
Winding Down the ESOP After the Deal Closes
Once the deal closes, it is time to shut down the ESOP.
In a stock sale, the ESOP Trust receives cash proceeds and is then closed. Plan participants become 100% vested at the sale and are eligible to receive distributions. Distributions are generally provided in a lump sum. Once the stock is sold, the ESOP Trust no longer needs to provide an annual valuation, however, the Trust must continue to file a Form 5500 Annual Report with the Department of Labor until all Assets have been distributed and all expenses paid.
In an asset sale, the company that was sold receives the proceeds. In most cases, the company is dissolved upon the sale and proceeds are distributed to shareholders, including the ESOP Trust. The Trust will hold the stock until final liquidation and must continue to obtain independent stock valuations until the liquidation occurs. As with the sale decision, liquidation and dissolution of the company may require shareholder approval via pass-through voting. If the ESOP remains intact or is not immediately terminated, participants can become eligible for distributions if their employment with the company ends. Otherwise, all participants become fully vested and may receive their distributions when the ESOP terminates. Similar to a stock sale, the ESOP Trust must file the Form 5500 Annual Report until all assets are distributed and expenses paid.
Contact Aegis Trust Company to Learn More About Selling an ESOP Company
Selling an ESOP owned company is possible and it may even be extremely beneficial to plan participants. In some respects, a purchase offer is an indication that the business is viewed as a success. Employees should take pride in that and be given the option of benefitting from it.
If you are considering forming an ESOP, terminating an ESOP, or need help understanding the rules governing ESOPs, contact Aegis Trust Company. We can help you make sense of your situation and advise you on next steps.
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