Can't Pay the Put

[Hoard1]

Employer has an ESOP plan in which 5 employees with over 5,000,000 in distributions will be due in two years. Plan document allows for immediate payouts or installment payments over 5 or 10 years at the election of the participant. Employer

can't pay the put with out overly encumbering the business. Anything they can do?

[RLL]

I wonder why someone would adopt or draft an ESOP plan document that provides such an election to the participants. And why wasn't this repurchase obligation issue addressed years ago? VERY BAD PLANNING AND/OR ADVICE.

I'd suggest amending the ESOP to change the benefit distribution provisions, to the extent permitted under IRC Sections 409(h) & (o) and 411(d)(6)©. As an alternative, find another source of liquidity...such as additional debt or equity capital, an IPO (if possible) or a sale of the company. Or get the 5 employees to waive their rights (but why would they without some compensation?).

[Kirk Maldonado]

The employer can delay the payments, to the extent that the payments would violate state law. Certain states, such as California, prohibit payments to shareholders if the payments would cause the corporation to fail to meet certain financial tests.

[Guest]

Under ERISA, the plan fiduciaries have to act in the best interest of the plan. If making payments in cash would change the value of the stock so that it would be worthless to other participants, I think they have the responsibility to delay payouts. But they must do everything they can, such as securing a loan etc to try and meet the payout responsibility.

[Dave Baker]

But even in the worst case of a "single-sum" distribution in the form of stock, the put option would not require the employer to pay cash immediately, yes? The cash payments could be stretched out over 5 years, maybe even 10? (Although there's an "adequate security" requirement that would tie up some corporate property as collateral.)

The details of the put option, as set forth in the plan document and ESOP regs, might not be quite as bad as it sounds. (Though $5M is a lot of beans, for sure.)

[Guest Babs]

The relationship between the liability, the valuation and the available cash does not seem to make this problem possible to the magnitude you imply. While profitable companies can certainly run out of cash, if the company really has enough value to create that kind of repurchase liability, it should be able to free up the cash to make the payments. If it can't, I doubt you have a good valuation but rather have been grossly overvaluing the company.