Guest Gibson Posted December 23, 1999 Posted December 23, 1999 ESOP is borrowing $ from bank in order to purchase employer securities from a shareholder. The loan will be guaranteed by the employer. The loan documents provide that the lender, under certain circumstances, can call the loan on 13 months notice, and require the guarantor to repay the loan in full. In that event, if the guarantor does not fully repay the loan, it's considered a default under both the ESOP loan agreement and the Guarantor agreement. Will this provision violate 54.4975-7(B)(13)?
RLL Posted December 24, 1999 Posted December 24, 1999 No.....an ESOP loan may be accelerated and payable on demand in the event of default. The fact that the company (as guarantor) is required to pay off the loan does not affect the liability of the ESOP to the bank lender, except that the company will become the ESOP's creditor when the bank loan has been paid. Is the ESOP pledging the "suspense account" shares to the bank? Or to the company? The disposition of this collateral will be an issue under the ESOP loan regulations. [This message has been edited by RLL (edited 12-24-1999).]
Guest Gibson Posted December 26, 1999 Posted December 26, 1999 In this case, however, the loan docs provide that the loan may be accelerated prior to default. I think this violates 54.4975-7(B)(13). Thanks for your reply.
RLL Posted December 27, 1999 Posted December 27, 1999 Gibson.....what are the "certain circumstances" that permit the bank to call the loan? Does the occurrence of such circumstances constitue a "default" under the loan? If so, the provision is permitted under the ESOP loan regs. Can the loan enforce the "call" against the ESOP or merely require the company to pay?
RLL Posted December 27, 1999 Posted December 27, 1999 Gibson.....why not have the bank lend to the company, with the company lending to the ESOP in a "back-to-back" loan arrangement? The bank loan can then include any provisions for default, etc., without raising any issues under the ESOP loan regs. The only real difference for the bank would be a limitation on its ability to get at the ESOP shares, if there is is an assignment of the shares pledged to the company. The bank is probably comfortable lending on the company's credit, with company assets as the collateral. Is this transaction involving the ESOP's purchase of a controlling interest in the company? If not, the value of a minority interest in the stock as collateral is not significant.
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