capitalize and buyout ESOP

[eilano]

Can the current owners of a privately held company capitalize and buyout their ESOP because of concerns about trustee liability? It's a non leveraged ESOP. Are there any issues regarding this?

[RLL]

eilano ---

An ESOP may be terminated by the sponsoring company. Such a decision is generally made by the board of directors. In connection with the termination of an ESOP, there must be a plan for the ESOP to dispose of its company stock.

Any decision for an ESOP to sell any of its company stock is to be made by an ESOP fiduciary who is looking out for the best interests of the ESOP participants and is required to maximize value for the benefit of participants. The ESOP cannot be required to sell its stock back to the company or the other shareholders.

Accordingly, it would be improper for the ESOP to consider offers to purchase its stock without the ESOP's being represented by an independent party....that is, a fiduciary unrelated to and not working for the other shareholders. Such fiduciary should negotiate the highest possible selling price for the ESOP's shares...it's not enough to merely get an appraiser who will determine "fair market value."

Since the "current (presumably, the non-ESOP) owners" want to eliminate the ESOP as an owner for their own benefit, they should be required to pay a premium price to acquire the ESOP's stock.

There are certainly other less dramatic means of dealing with concerns about trustee liability. Have they looked into retaining an independent trustee? Have they obtained fiduciary liability insurance? Have they retained competent legal and financial advisers? Did they think about any of these issues before establishing the ESOP?