Are "restricted" securities subject to a put?

[smm]

Privately traded company has an ESOP. Distributions are of course, subject to the put requirement in 409(h). Company is being purchased by a publicly traded company. Net result after transaction closes is that the ESOP will hold shares of a publicly traded company. Put option no longer relevant because shares are "readily tradable on an established market". Query: For the first 12 months following the sale, publicly traded stock will be "restricted" under the securities laws and cannot be sold in the public market. After that, stock is freely tradable. Are the shares subject to a "put" whicle they are restricted?

Thanks.

[RLL]

smm ---

Shares which are "restricted" under the securities laws are not "readily tradable." Accordingly, the put option requirement of IRC Section 409(h)(1)(B) would apply to any shares distributed (from the ESOP) which are subject to such a trading limitation. See Reg Section 54.4975-7(B)(10).

If this is a problem, can benefit distributions be deferred until the restriction lapses?

It is possible that shares distributed from the ESOP to "non-affiliates" may be tradable without regard to the restrictions of SEC Rule 144. Check with SEC counsel on this. If this is the case, the put option requirement would not apply to any such shares.

[smm]

Thanks for your reply. I reached the same conclusion that you did, but thought perhaps that I could distinguish between a privately held company and NASDAQ securities that are legended for a short period of time. Wishful thinking. I did consider deferring distributions as a way around the problem. I think that will work.

[smm]

Additional thoughts on this question are still appreciated. I looked at the regulation that is cited by RLL. The regulation applies to securities that are acquired with an exempt loan - this is not a leveraged ESOP. I also realize that the regulation was issued before 409(h). Does this change the result?

[RLL]

smm ---

In the absence of regulations under Section 409(h)(1)(B), through which the put option requirement was first added to the IRC in 1978, the best guidance for interpreting the put option requirements is the put option provision of the 1977 ESOP loan regs. Section 409(h)(1)(B) extended the requirement to non-leveraged ESOPs.

[smm]

Once again, thanks for your thoughts. In the end, I agree with you.