Guest kbutcher Posted June 21, 2000 Posted June 21, 2000 Would it be crazy to see a call option in an ESOP document providing the employer a right to purchase the stock (purchased with the proceeds of an exempt loan) that has been distributed to the participants? So as to avoid confusion, I am not referring to the Right of First Refusal but rather a full blown call option. Appreciate your thoughts.
RLL Posted June 21, 2000 Posted June 21, 2000 Crazy? I don't think so. Are you asking whether such a provision is legal or immoral? IRC Section 409(h)(2) permits an ESOP to deny distributees the right to demand receipt of benefit distributions in the form of employer stock in the event (1) the corporate bylaws or charter restrict ownership of substantially all stock to employees and qualified employee trusts; or (2) the employer is an S corporation. It's not a great stretch to provide for a call option in these situations....so long as it is applied in a uniform and non-discriminatory manner. Note that the 1977 ESOP loan regulations have been superceded in part by subsequent ESOP legislation, including IRC Section 409(h). If the IRS issues a determination letter with respect to an ESOP under IRC Sections 401(a) and 4975(e)(7)....Application must include Form 5309....and the plan document includes clear (disclosed) provisions for the call option, who can then object? The provision should also be disclosed in the SPD. Why not try and see whether the IRS will pick up the issue....most reviewers probably won't.
Guest kbutcher Posted June 21, 2000 Posted June 21, 2000 Although I would agree with your assessment that we could include it in the plan and get a determination letter and be fine. However, I am concerned that it really defeats the purpose of 409(h). I can see placing a call option in place for SESOPs to avoid violating the 75 shareholder rule (or some other shareholder qualification limitation), but to simply give the employer the right to purchase the shares back at any time just does not seem to be in the spirit of 409(h). I appreciate your time and comments. Thanks.
Kirk Maldonado Posted June 21, 2000 Posted June 21, 2000 Would the call option expire if the employer went public? In that regard, it would seem that the call option would have to comply with applicable state securities laws. Some states impose limitations upon call options. Kirk Maldonado
Guest kbutcher Posted June 21, 2000 Posted June 21, 2000 Are you saying that it would trigger Securities Laws if it did expire or did not expire?
Kirk Maldonado Posted June 21, 2000 Posted June 21, 2000 I'm saying you need to take into account applicable state securities laws regarding the very design and implementation of a call option. Kirk Maldonado
RLL Posted June 21, 2000 Posted June 21, 2000 The objective of providing tax incentives for ESOPs was to enable EMPLOYEES to share in the ownership of company stock. As a general rule, ESOP benefit distributions are made following retirement or other termination of service. It is not inconsistent with this policy to provide for ESOP benefit distributions to FORMER employees in the form of cash. It is clearly inappropriate to permit the employer to exercise a call option with respect to shares still owned by the ESOP for the benefit of current employees.
Guest kbutcher Posted June 21, 2000 Posted June 21, 2000 In stating at any time, I was referring to any time after a distribution event has occurred and the employee has received a distribution in the form of stock.
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