Multiple classes of common stock?

[Guest MikeD]

Is it possible for the ESOP to own stock that would have the greatest voting rights and would also pay dividends, while the other owners own stock that is not dividend paying? Thanks.

[RLL]

MikeD ---

The answer is "yes" if the employer stock owned by the ESOP is common stock. If the stock owned by the ESOP is preferred stock, the stock must be convertible into common stock in order to satisfy the requirements of IRC section 409(l).

For purposes of this Q & A, I'm assuming that the company has no class of common stock that is publicly traded.

[Guest MikeD]

MikeD ---

The answer is "yes" if the employer stock owned by the ESOP is common stock.  If the stock owned by the ESOP is preferred stock, the stock must be convertible into common stock in order to satisfy the requirements of IRC section 409(l). 

For purposes of this Q & A, I'm assuming that the company has no class of common stock that is publicly traded.

No, the stock is not publicly traded...and that is what I thought. The company would have two classes of common stock. One class, which would have the greatest voting rights, will be owned by the Plan and the second class will be owned by individuals. The idea is to pay dividends on the stock that the ESOP owns and not pay dividends on the rest of the stock (in order to retire the ESOP debt quicker). Does this still sound right? And, thanks again!

[RLL]

MikeD ---

Be careful with this.

In an extreme case, it is theoretically possible that the IRS could take the position that this arrangement was a sham set up to avoid having to pay non-deductible dividends to the non-ESOP owners (who might be receiving deductible compensation in the form of salaries or bonuses) and/or to avoid application of the section 404(a)(9) and 415© limits on ESOP contributions.

Also note that the per share value of the ESOP's stock could be substantially higher than the stock owned by the non-ESOP owners. You'll also have to address now what will happen when the ESOP debt has been fully repaid.

[Kirk Maldonado]

RLL:

Want to you think of only having one class of stock, but having the non-ESOP shareholders waive their right to dividends?

[RLL]

Hi Kirk ---

I think that would raise more serious potential problems with IRS than using separate classes of stock.