Non-publicly traded company converting to public company

[Guest RMM]

Can someone please verify for me that a company which previously maintained an ESOP w/o public stock pursuant to IRC 409(l)(2) and is now going to have a new public class of stock, must exchange the securities in the ESOP b/c it will be a 409(l)(1) company. Does anyone know the mechanics of how this can be done or have experience with it? I don't think it seems like a rare situation, but we have very few clients with ESOPs (especially nonpublic ESOPs). Thanks.

[RLL]

Will the class of stock now owned by the ESOP become publicly-traded? If the ESOP now owns convertible preferred stock, will it be convertible into the class of common stock that will be publicly-traded? Is the ESOP leveraged (is there still an ESOP loan which has not been fully repaid)? Are there dividends intended to be deductible under IRC Sec. 404(k)? Does the ESOP include a money purchase pension plan? Is there another reason for the ESOP to continue to be a "Sec. 4975(e)(7) ESOP" or is "simple stock bonus plan" status enough?

I guess I have more questions than answers for you, RMM. But your question can only be accurately answered if you give more facts.

It is correct that a "statutory ESOP" under IRC Sec. 4975(e)(7) must be invested "primarily" in employer stock satisfying the requirements of IRC Sec. 409(l).

[This message has been edited by RLL (edited 02-04-2000).]

[Guest RMM]

Thanks RLL. I'm just speaking a hypothetical, general sense. Assuming a nonleveraged ESOP (no MPP) of closely held stock. This company is going to have a new and separate class of public stock. Assume the client would prefer to stay an ESOP.

Therefore 409(l)(1) would seem to apply and it would have to be the public stock in the ESOP. But there is nothing telling you what to do with the ESOP made of closely held stock. I just wanted a simple letter or ruling saying: value the two stock classes and do a pro rata exchange based on these values, or something like that. I'm guessing at this last part, though. Thanks.

[RLL]

The best alternative might be for the ESOP to exchange its shares for the class of employer stock that will be publicly traded. The exchange should be at the respective fair market values of the shares on the exchange date (presumably, immediately prior to the effectiveness of the IPO). With publicly-tradable shares, ESOP benefit distributions will be greatly simplified (distribute the shares, no "put option" required).