RLL

A sale of stock does not involve a shareholder vote. It is an investment decision to sell by the owner of the stock. It does not involve a corporate action (such as a merger) that requires a vote of shareholders. No vote needed, so there’s no vote to pass-thru to ESOP participants.

Under the ESOP loan regulations and IRS guidelines, only contributions (made for loan repayment purposes), dividends on the shares that were acquired with the loan proceeds, and cash proceeds from the sale of suspense account shares (in certain limited situations) may be applied as payments on an ESOP loan.

You might consider “defrosting” (reactivating) your frozen ESOP. Talk to an experienced ESOP professional about this.

1042 treatment would not be available to the selling shareholders under these circumstances. Under a "step transaction" theory, a pre-arranged deal such as this would be treated as a sale of stock by all shareholders (including the ESOP, with respect to its existing 24% holding) to the unrelated buyer. The intervening "sale" to the ESOP would be disregarded. It's disappointing that professional advisors and trustee would be involved in structuring such a sham transaction.

The 51% owner should not have sold control of the company without offering a similar buyout opportunity to the 49% owner (the ESOP). If the "owner" received $18 million (or more) for his 51% interest, the ESOP's 49% is worth substantially more than $3.1M (it's likely worth over $17M). In light of the recent stock purchase by the President, it doesn't take an independent valuation to determine that. And it appears that both the 51% owner and the President are/were fiduciaries of the ESOP. Based on these facts, this looks like somewhat egregious violations of ERISA's fiduciary provisions, including prohibited transactions. An ESOP lawyer with litigation experience should be contacted. Or take this situation to the local office of the Department of Labor. The ESOP and its participants could be entitled to an additional $14M (or more).

An S Corp ESOP is not exempted from the put option requirement. It is exempt from the requirement that distributees have a right to demand distributions in the form of employer stock and may provide that any stock distributed is subject to an immediate buyback by the employer.

Forfeiture of otherwise vested benefits for this reason would likely violate the vesting requirements of ERISA.

Did the former owner elect under IRC Sec 1042 with respect to the sale?

Correct.

The transfer of the company stock to the PSP could be exempt under ERISA Section 408(e) if the PSP includes provisions that qualify it as an EIAP. But the transfer of the real estate to the party in interest as payment would not fall within the purview of the 408(e) exemption. Seek an individual transaction exemption from DOL.

Stock issued as a result of a stock split is treated as having been acquired at the same time as the shares with respect to which the new shares are issued.

What does the Stock Restriction Agreement say about determining fair market value for purposes of the transaction?

Seek the advice of legal counsel experienced in ESOPs and corporate governance issues.

QDROphile is correct about taking shareholder action without a vote ... if it can be done under applicable corporate law and the governing documents. It may also be possible to effect the proposed reclassification/recapitalization by an exchange of shares, without a shareholder vote. If this approach were to be followed, it may be appropriate to obtain a fairness opinion for the ESOP. If a shareholder vote is required (and action by consent is not available), the vote by the ESOP trustee must be done based on the ESOP "voting pass-through" requirement ... even if the ESOP's 30% cannot affect the result. The pass-through of voting rights likely would involve some disclosure of certain material facts, etc., to ESOP participants.

Depends largely on applicable corporate law. Issues to be addressed include the following: (a) Is a shareholder meeting and vote required or may the recapitalization be effected by an exchange of shares without a vote? (b) Is shareholder approval available by consent without a meeting? © What percentages of each separate class of stock are owned by the 70% shareholder? (d) Are there any provisions in the articles of incorporation that may affect this? You shouldn't expect an answer to such a difficult question from a message board such as this. You haven't provided enough facts. Necessary legal documents need to be carefully reviewed. I recommend that you consult with legal counsel experienced in corporate, securities, and ESOP law.