Can former owner of co now become ESOP participant

[Luis Miguel]

So the former owner of the company sold all shares to the ESOP. So he got paid for those shares in that transaction. However, now he is also a Plan participant. He would then arguably also get those shares (well at least some) allocated to his Plan account. Shares are allocated based on compensation, and since he's paid the highest, he gets the biggest peice of the shares released each year. Is this allowed? Somehow this seems wrong....

[Lou S.]

How much did he own before the sale and is the ESOP leveraged?

[RLL]

Did the former owner elect under IRC Sec 1042 with respect to the sale?

[ESOP Guy]

The 1042 question is the key question here. We have to know that answer.

[ESOP Guy]

A few additional observations on this question:

Even if the owner is entitled to allocations in the ESOP (which is very likely) it might not be as bad as you think. Between the compensation limits and the 415 limit the benefit is capped. So the benefits might get spread pretty good.

One of the things that gets lost when a company is sold to an ESOP and the previous owner stays on as an employee is that the prior owner is JUST an employee now and needs to be paid like an employee.

Before the owner pretty much got to set his pay package how he wanted and that was most likely driven by tax considerations. So the mix of salary, benefit, dividends tended to not reflect market value of work but the owner's wishes. That was fine when they were the owner it is basically their money at that point.

This person is an employee now. Most likely they are an executive. The board of directors now had a fiduciary obligation to the stockholder (now ESOP) to make sure executive compensation (including all benefit like the ESOP) is reasonable and reflects the market price for that position.

So maybe the better question is has the board's compensation committee reviewed the executive compensation to make sure it is market based?

[Luis Miguel]

Thank you for your responses. To answer some of your questions:

The ESOP is leveraged

He owned 100% of the shares prior to the sale of stock to the ESOP

He is still an executive at the company

I'm not sure about the 1042 question, but even assuming that he is entitled to ESOP allocations, you have provided me with some food for thought about compensation limits and whether the BOD even reviewed his executive compensation package. I will definitely look further into this now.

Thank you again for providing some direction.

[david rigby]

Market-based or not, it's likely the compensation of the former owner is governed by (or at least influenced by) a contract/employment agreement.