Put shares as collateral

[dmwe]

In a case where the Put of shares back to the company is paid out via a Promissory Note over a 5-year period, is the stock held as collateral for the Note? Or, are all of the shares turned over to the company in exchange for the Note and the Note is held as the asset in the rollover IRA?

I think the IRA owner would be more comfortable holding the shares as collateral and then releasing 1/5th of the shares each year as the Note is paid down.

How are these typically handled?

[RLL]

IRC section 409(h)(5)(B) requires that the company provide "adequate security" for any installment balance in connection with the payment for shares repurchased under the put option. The shares are generally not considered to be "adequate security" for this purpose. Actual assets of the company or a surety bond should be provided as security. The repurchased shares are either held as treasury shares or revert to the status of authorized but unissued shares (as provided under applicable corporate law).

[GMK]

Haven't put a lot of thought into this, but..

what if the ESOP takes out a 5-year loan to acquire the distributed shares. The shares go into a suspense account and are released and allocated to participant accounts as the employer's contributions pay off the loan. (Assuming the Plan Doc allows all this.)

[dmwe]

Thanks for the responses. The "adequate security" is the key. I'm not sure the company has ever provided anything other than the Promissory Note.

[Marcus R Piquet]

Sometimes companies will obtain a standby letter of credit from their bank to serve as collateral for this purpose.