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The ESOP Repurchase Obligation Handbook

(Digital Version)

5th Edition

by Tim Cleary, Patrick De Craene, Judith L. Kornfeld, Anthony I. Mathews, Nathan Nicholson, Thomas Roback, Jr., Loren Rodgers, Kevin T. Rusch, Pete Shuler, Nancy Wiefek and Kelly ("Bucky") R. Wright

This is provided as a PDF, with no shipping charges. It also is available in a print version (for which shipping charges apply).
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Every closely held company with an ESOP has a legal obligation to offer to buy back stock distributed to ESOP participants; this is called the "repurchase obligation." Written by leading experts, this book combines practical discussions with research in exploring the repurchase obligation and how it can be planned for and dealt with. A major feature of the fifth edition is a detailed report on the NCEO's 2017 survey of how ESOP companies handle their repurchase obligations, accompanied by dozens of extensive tables. The fifth edition also features two new chapters on releveraging an ESOP in addition to updates to existing chapters.

Publication Details

Format: PDF, 93 pages
Dimensions: 8.5 x 11 inches
Edition: 5th (November 2018)
Status: Available for electronic delivery

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The Repurchase Obligation: Paying Up
The ESOP Repurchase Obligation Study
The Repurchase Obligation in S Corporations
Funding ESOP Repurchase Obligations
Repurchase Obligation Impact on Sponsor Company Share Value
Should You Releverage Your ESOP?
Nuts and Bolts of an ESOP Releveraging Transaction
The 2017 NCEO Repurchase Obligation Survey


From Chapter 5, "Funding ESOP Repurchase Obligations"

The benefit provided to participants in an ESOP is generally defined as the value of employer contributions (that are not used for payments on internal ESOP loans) plus the value of shares released from loan suspense. Increases in share value and dividends are generally not included in the calculation of the benefit level. If a company handles repurchase obligations by contributing whatever cash is needed to fund current repurchase obligations, then the benefit level would equal the repurchase obligations plus the value of shares released from loan suspense.

ESOP companies are often advised to limit the benefits they are providing through the ESOP to a "normal" level of benefits to avoid negatively affecting share value. (What constitutes "normal" is generally related to the industry and geography in which the company operates.) If repurchase obligations consistently exceed the company's desired benefit level, the company will have to meet a portion of the obligation in some way other than contributions. These might include handling part of the repurchase obligation by having the company redeem shares, or by paying dividends or S distributions to recycle some of the shares. These techniques have consequences that are discussed later in this chapter.

High benefit levels do not necessarily make an ESOP unsustainable. Managing the benefit level does not reduce the cash requirements for repurchase obligations and may in fact increase them. Far more important for sustainability is whether the company is generating enough cash to meet all of the needs of the business, including repurchase obligations, without impeding growth.

From Chapter 8, "Nuts and Bolts of an ESOP Releveraging Transaction"

It is important to consider the possible collateral pledge of the releveraged shares. There are instances when a large participant distribution combined with a substantial segregation results in a large number of shares being redeemed from the ESOP, and these shares then being releveraged for future allocations. In these instances, the plan sponsor may need to reach out to a bank or other financing source for the cash needed to effect the redemption. This will generally result in the shares being purchased by the ESOP being pledged to the third-party financing source. The plan sponsor and the trustee will need to know if the pledge is required and make sure the ESOP loan documents are drafted correctly. Another consideration when third-party financing is being used would be protecting the account value of participants that may be close to retirement. When debt is added to the balance sheet without a corresponding reduction in the number of outstanding shares, the equity value of the plan sponsor and resulting per-share value will experience downward pressure. The plan sponsor may wish to implement price protection for certain participant distribution values for a short period of time. This is a plan sponsor-level decision and is not legally required but should be discussed.