All ESOP stock being purchased by current shareholder

[Guest deathbycashcall]

Small ESOP owns 50% of company stock. Remaining 50% is owned by President of the company. President has decided to buy out the ESOP to create liquidity for the aging workforce. Is it necessary to put the transaction to a vote by the ESOP participants? Since it is not a merger, liquidation or dissolution of the business, I'm thinking not.

Secondly, once the stock is purchased is there any reason the plan cannot then be merged into the existing 401(k) plan? Vesting is not an issue, but President does not want to give distribution options to the younger employees if it's not necessary. I'm thinking a merger would be okay to avoid a distributable event for all participants.

Thanks for any input.

[RLL]

A vote by the ESOP participants is not required. The ESOP trustee or another ESOP fiduciary (who is independent of the President) must decide whether the ESOP will sell its shares and at what price. The purchase price must be no less than fair market value (as determined by an independent appraiser) as of the transaction date. The shares cannot be sold merely because the President has decided to buy out the ESOP; the ESOP must agree to sell.

If the ESOP does sell its shares, it may be appropriate to merge the assets into the 401(k) plan.

[ESOP Guy]

As RLL pointed out one of the key elements here is the person deciding if the ESOP should sell and if the price is FMV needs to be independent from the president. I would strongly recommend advising the client to hire an independent trust company to represent the ESOP for the purchase. There are a number that specialize in ESOPs. It can be an added cost that the client will push back on, they won’t want to spend that money.

However, it can offer a fair amount of protection if the DOL comes looking into the deal. I have experience with several of these situations where management in effect was both sides of the deal. They were buying and were the ESOP’s trustees. Just the fees for accountants, TPAs and lawyers for time spent on the DOL audit was more than the upfront cost of a trust company. And the DOL demand to pay more to the plan’s participants because the price was too low was greater than a trust company’s costs also.

In short the trust company looks expensive, but in my mind it is cheap insurance.

[Peter Gulia]

Or the independent fiduciary could be a natural person rather than a trust company.

Some lawyers and other professionals, including some who have a combination of ERISA and business experience, are willing to accept the weighty and personal responsibility of serving as an independent fiduciary.