Binding Sale Contracts and Control Premiums

[Guest kbutcher]

Has anyone dealt with the issue of whether an ESOP trust can pay a controlling/majority value for a transaction in which the shareholders sell their shares in stages(i.e 48% in year 1 and 5% three years later). We are looking at this and there appears to be quite a bit of controversy between trustees, lawyers and valuations folks. Everyone who says its OK appear to be hanging their hat on the proposed 3-18 regs. Whereas everyone else seems to think that since those regs may or may not have been pulled, that there is no support for this proposition. I would very much appreciate your comments.

[RLL]

If an ESOP enters into a contract with shareholders to acquire a controlling interest in employer stock over a period of years, the use of controlling interest value ought to be acceptable under the "adequate consideration" standard if the terms of purchase meet an "arms-length" standard.

Terms of the purchase should require the use of "controlling interest" value for purposes of valuing ESOP participants' accounts and paying benefits. The terms should also be binding on the shareholders without requiring the ESOP to purchase under any circumstance. The employer should guarantee financing for the ESOP to complete the purchase of control. There should also be "come along" and "bring along" rights, as well as rights of first refusal, appropriate to protect the ESOP.

In addition, it would be preferable for the ESOP to be given a proxy for the shares subject to the option and for the ESOP to actually designate a majority of the directors.

With appropriate provisions such as these, the "adequate consideration" requirement is likely satisfied, whether or not the fiduciary is relying on the proposed DOL regulation under ERISA Section 3(18)(B),