Taking an 50+% ESOP-owned Company Private

[Guest RMM]

A company which has an ESOP that owns over 50% of the stock of that company wants to go private. Management's plan is to purchase all the stock in the ESOP, then merge the Company into a privately-held company. What happens to the ESOP? What do the Employees get? Can anyone point me to a helpful article/source on ESOPs? Thanks.

[RLL]

The ESOP could be terminated, frozen or converted (or merged) into another type of plan (e.g., profit sharing/401(k)). ESOP participants would likely be vested in the value of their ESOP accounts, and would receive benefit distributions in cash if (and when) the ESOP is terminated.

The biggest issue here is the price to be paid to the ESOP for its company stock. A significant premium over "fair market value" should be paid.

Who is the fiduciary that will make the ESOP's decision to sell (or not to sell) and at what price? The management shareholders (and others who will own stock in the surviving company) clearly have a conflict which should preclude their serving as ESOP fiduciaries in the transaction. An independent fiduciary should be retained to represent the ESOP in this transaction.

It's not enough to merely pay the ESOP a price that an independent appraiser says is "fair market value." The ESOP fiduciary is obligated to negotiate for the highest possible price. What would a third party pay to buy company? What's it worth to the management to buy out the ESOP?

This appears to be a "buyer-driven" transaction....it's not the ESOP which wants to be bought out. Accordingly, the buyers should pay "top-dollar" to buy out the ESOP.

[This message has been edited by RLL (edited 12-28-1999).]