ESOP Questions Company Bought Out

[Guest catdjc123]

Company A has an ESOP and is being bought out by Company B. Company B is paying cash and all ESOP stock in company A will be paid out in cash to the employees for transfer/rollover to an IRA. The offer is for 2x the value of the ESOP stock. The ESOP will terminate when the deal is closed.

Questions:

1. Are former employees who terminated in the last two years with partial vesting and have not been paid out entitled to become automatically 100% vested?

2. Are those same former employees entitled to the offer price (2x value of ESOP stock) for their shares or can they be cashed out at the pre-sale stock price?

3. Can the company "claim" that the former employee have been paid out prior to the announced sale even if the employee has not received any notification or received any payout funds?

4. Related to #3 above - What constitutes pay out that would "close the books" on a former employee. Is it receipt of the funds by the former employee or is it an accounting entry at the company saying that the employee has been paid out even if the funds have not been disbursed.

Thanks for any help.

[stephen]

1. Seek ERISA Attorney advice on this entire (1-4) process unless it is spelled out in the document.

My what a tangled web we weave when trying to exclude participants from benefitting in the gain of the ESOP when the company is sold and the shares significantly increase in value. I have seen plans handle this by 100% vesting everyone who still have a balance and by only vesting the participants who were still active at the time of the buyout.

2. When an employee is "cashed out" of the ESOP they are entiled to the current fair market value price.

3. I think not. I would not want to be involved if one of these participants called the DOL and said, "My employer just cheated me out of $XX,XXX.XX. Please help me." An employee with a balance under $5,000 could have been mandatorily cashed out if given the proper notice etc. But it seems too late for that now.

The fiduciary is supposed to look out for everyone's best interest. A terminated employee who has an account balance is still a participant.

4. In my opinion, the employee would have to receive a check not simply an accounting entry.

[namealreadyinuse]

Yes

Yes

No

Distributions are made when the check is cut. Don't forget, participants have to request distributions and ESOP participants generally have the right to take stock if dists are being made before the sale.

I suspect that your motives are going to get you in trouble.

[Guest catdjc123]

These are not my motives. I am an employee trying to figure out what the company can or can't do during the pending sale and what I should expect to receive as a former employee who left in the last two years (40% vested, but have not been paid out to date).

So far, there has been no official word from the company. There has been lots of unofficial talk running the gamut of the 4 scenarios posed above - basically that former employees would not be bumped up to the automatic 100% vesting that the plan says occurs when the plan is terminated, that former employees would not even get the 2x ESOP price because they were cashed out prior to the announced sale - even though no payout has been received by those employees, etc.

In case it is relevent I should mention that our plan says that distributions of stock are precluded since the stock ownership is restricted to employees so we are not allowed to take a distribution of stock - only cash.

[stephen]

If you still have stock in your account it should be purchased from you at the current fair market value price. If your stock balance was exchanged for cash in the plan and you only have cash you should only get the vested portion of the cash in your account thus you would not get the 2X value for the stock.

Forgive us for our cynicsm, in your initial post it seemed like you were a third party administrator looking for advice not a participant.

[RCK]

Unlike stephen, I read your original post as coming from an affected participant. But I have to say that I expected your post to be a response to a set of facts that had actually occurred, not a reponse to a bunch of rumors that you had heard.

If your former employer was fair and generous in the past, they probably will be again, and unfortunately if they were not before, they're not going to be now. But now you will have the ear of the DOL, which will be very interested if several people contact them with complaints.

[Guest catdjc123]

Thanks for all the answers. While my scenarios are presently hypothetical they do represent questions that a lot of participants are wondering about. It also helps us understand a little better this complicated process of what happens to an ESOP during a corporate buyout.

One last question that seems to be coming up a lot. Once the company announces their decisions as to how participants will be compensated who reviews their decisions to ensure that they are correct? Does the IRS or DOL review and/or approve the payout plan the company comes up with?

[BeckyMiller]

If the plan is subject to a financial audit, the plan's independent auditor should look at the appropriateness of the distribution process in accordance with the plan documents. But, benefit plan auditors are not lawyers and they may not catch each and every issue.

There is no requirement that the IRS or the DOL review the termination of a plan. However, they frequently do audit the terminations of ESOPs if there is a fair amount of money involved or something else that makes them wonder.

Good luck - I hope your company has competent advisors and that everyone is treated fairly.