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ESOP termination - stock nearly worthless


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This can't be all that uncommon, yet I'm finding very little information about it.

Suppose a company basically runs into such financial trouble that their stock is now almost without value (likely bankruptcy, but I don't know that). ESOP will be terminated. Apparently the last valuation from a few months ago shows participants with substantial account balances, but of course now they are nearly worthless. Other than possible fiduciary issues, which isn't in question here, is this just as simple as paying the participants their current balance based upon stock value - i.e. no different than any plan where assets have dropped precipitously in value?

Participants have right to take their distribution in stock, although I don't know if this is one of those plans where corporation by-laws or charter prohibit outside ownership. If the company is in the toilet, participants probably won't want stock anyway! And I don't know where the plan falls in a bankruptcy heirarchy.

Just wondered if anyone has encountered this?

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Belgarath,

What would normally happen in a situation like this is that the Board would terminate the ESOP, resulting in 100% vesting for all participants. The ESOP stock would be re-appraised at the end of this year, at which point the accounts would be re-valued to reflect the near-worthlessness of the ESOP stock. You would then proceed to make distributions as called for in the plan document and/or distribution policy. You may even amend the plan document or distribution policy to accelarate the timing of distributions in connection with the liquidation of the Plan.

If there are participants that are due a distribution this year and you know their accounts are significantly overvalued, most plans contain a provision whereby the trustee or committee can declare an interim valuation date so that you could re-value the plan prior to paying out the current batch of distributions. This introduces added expense for an additional appraisal, but you could potentially distribute all of the ESOP's stock after obtaining that interim valuation and thereby eliminate the need for a year-end valuation.

Does this get at the core of your question?

Marcus

Marcus R. Piquet, CPA

American ESOP Advisors LLC
5995 Brockton Ave Fl 2, Riverside, CA 92506-1833
(951) 779-1124 (v) (951) 346-0896 (fax)

mpiquet@AmericanESOP.com

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Just a thought: if the company has a bankruptcy attorney, it would be prudent to get that person's opinion before amending and/or terminating the plan.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Belgarath,

What would normally happen in a situation like this is that the Board would terminate the ESOP, resulting in 100% vesting for all participants. The ESOP stock would be re-appraised at the end of this year, at which point the accounts would be re-valued to reflect the near-worthlessness of the ESOP stock. You would then proceed to make distributions as called for in the plan document and/or distribution policy. You may even amend the plan document or distribution policy to accelarate the timing of distributions in connection with the liquidation of the Plan.

If there are participants that are due a distribution this year and you know their accounts are significantly overvalued, most plans contain a provision whereby the trustee or committee can declare an interim valuation date so that you could re-value the plan prior to paying out the current batch of distributions. This introduces added expense for an additional appraisal, but you could potentially distribute all of the ESOP's stock after obtaining that interim valuation and thereby eliminate the need for a year-end valuation.

Does this get at the core of your question?

Marcus

There is a potential problem with this approach.

The stock that's distributed upon termination of the ESOP will be subject to the required put option (assuming this is not a publicly-traded stock). To the extent that there is value in the stock, who will honor the put option (and purchase the shares)? The company likely has very little cash available. Even if it does have cash, the company may have no retained earnings, which may prevent the company from purchasing its own stock. A bankruptcy filing could further complicate the repurchase of stock by the company. It may be preferable to retain the ESOP, which would remain a shareholder of the bankrupt company and would be treated the same as other shareholders.

What % of the company is owned by the ESOP? Who are the other shareholders?

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