Company Selling Stock

[Guest Aidin]

My company is selling all of its stock to another company. Our ESOP owns approximately 1/2 of the company stock. The buyer is proposing to pay ALL shareholders (myself (as well as other employees) from stock option exercises, all other shareholders AND the ESOP) with a portion of the sales proceeds in a promissory note with a 2 or 3 year term. Evidently the terms of the note are going to provide that only / I guess balloon payment .. may be reduced if my company (as sold) does not continue to perform at some specified level.

Me and a few coworkers are very nervous over this arrangement. We are unsure what that "note" actually means and the amount which we will be paid.

One of my friends works with the ESOP administration section of our HR group and we understand many of the associated ESOP rules and issues and this just doesn't "smell right."

Any insight / thoughts would be appreciated.

THANKS

[RLL]

Hi Aidin ---

Under ERISA it may constitute a prohibited transaction for the ESOP's stock to be sold for a note in such a transaction...as such a transaction could result in there being a prohibited extension of credit from the ESOP to the sponsoring employer...unless the ESOP is being terminated prior to the completion of the transaction.

I agree with you that this proposed sale doesn't "smell right." If the ESOP owns 1/2 of the total outstanding shares of the company, it is in a position to block the sale on such terms and/or to negotiate for a better deal. Who is looking out for the interests of the ESOP participants?

[Kirk Maldonado]

Expanding on RLL's comments, I think that you need to hire competent counsel to represent the ESOP. It would also be prudent to hire an independent fiduciary for the transaction.

[Guest Aidin]

Thank you both for your responses. We thought perhaps this was somehow prohibited under ESOP rules. Evidently the company has went out and got the ESOP its own counsel so hopefully the structure of the acquisition will be changed to address this issue.

RLL ... if payment with the note would be prohibited by the ESOP .... and lets say that as you suggest they decide to terminate the ESOP ... so they (the ESOP and other shareholders) accept the note as part of the payment of purchase price .. then they terminate the plan ... doesn't that still involve the ESOP having "extended credit" to the buyer / new employer as the term of the note will be for a few years? I guess I just don't understand how the problem would go away if they terminated our plan since they want to pay us over a period of years and then perhaps reduce the eventual payment based on how good our company does during that period. The note and the reduction seemed odd in tandem.

Is the reduction mechanism based on how the company does in the future AFTER the sale is finished ok to do?

I appreciate everyones input and understand the facts are probably a bit abbreviated and any answer is just peoples impressions .. but everything is helpful.

THANKS