Put options on Non-Marketable Securities

[Guest johnpetrancosta]

We have one ESOP, it is for a privately held company. I was asked to do research on a new (i think) provision which allows the Sponsor (as opposed to he plan) to offer put options to buy back particpant ESOP shares for non-marketable securities. Does anyone have any information on this relating to mechanism, requirements, type of transaction etc? I confess to having very limited ESOP experience, so it might be easy to talk over my head. I thank you in advance for your time, consideration and patience.

[RLL]

johnpetrancosta ---

Please don't take this personally.....but the ESOP "put option," which is provided for in IRC section 409(h)(1)(B), has been a very basic requirement of ESOP law since the 1970s. If you don't even know about the existence of this rule, you really have no business advising anyone regarding an ESOP.

[stephen]

For informaiton on Put Options you may want to check: The ESOP Association or NCEO website's or perhaps check with an ERISA Attorney in your area.

[Kirk Maldonado]

I concur in the remarks of RLL.

Furthermore, trying to learn all that you need to know about ESOPs would be counter-productive if you only have one client. There is so much to learn about ESOPs that it makes no sense to try to master the area unless it is a sizeable part of your business. Most people wisely choose to either do them on a regular basis or stay away from them.

There are many traps for the unwary involving ESOPs, especially because they involve securities laws issues. Extremely few ERISA practitioners have any background in securities laws matters.

[stephen]

Or you could invest time and effort into learning all you can about ESOPs and build up that part of your practice. Thus, making your investment worthwhile.

[BeckyMiller]

Gosh - he asked for time, consideration and patience..... Not sure that is what we gave him.

But, I must agree that ESOPs are nothing, if not a trap for the unwary. The best service to your firm and your client is to dedicate yourself to learning all the intricate rules, resign from the engagement or see if you can team up with one of the skilled ESOP administration concerns.

Back to your question, RLL sent you to the applicable Code section. There you will see that the standard form of the put option is to have the company provide the put. The ESOP is the privilege of offering to purchase the stock, but not the obligation.

[Guest johnpetrancosta]

Thank you Becky. When I said we do one ESOP, we do not administer it. One of our clients has an ESOP, that we provide some accounting services for. Historically, it has been the plan itself that has re-purchased the shares when the participants exercise the puts. Since that is what I have seen I thought it was the norm. In an effort to remove some burden from the plan, the client asked if the company could re-purchase the shares instead of the plan, and I was asked to verify whether it was appropriate. Although the initial replies were heavy handed and condescending, they provided me with the information I needed to address the clients question, and for that I am thankful to all.

JP