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The ESOP Repurchase Obligation Handbook
by Judith Kornfeld, Anthony Mathews, Thomas Roback, Jr., Loren Rodgers, Pete Shuler, Kelly Wright, and Carolyn F. Zimmerman
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Format: PDF, 78 pages
Dimensions: 8.5 x 11 inches
Edition: 4th (July 2011)
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
The 2010 NCEO Repurchase Obligation Survey
From "Funding ESOP Repurchase Obligations"The selection of funding methods is affected by how the company handles repurchases—through the ESOP or by redeeming shares. This, in turn, has an impact on the number of shares that will have to be repurchased over time, the tax treatment and the cost of repurchases (which in turn affects cash flow and potentially the value of the company), and the value per share of the company's stock.
When repurchases are handled through the ESOP, or "recirculated," the company contributes cash (or pays dividends or S corporation distributions) to the trust that are used to liquidate the shares that are to be distributed. The distributions are made in cash, and the shares remain in the trust and are allocated to the participants whose cash balances were used to fund the distributions. Contributions (but not dividends or S corporation distributions) to the trust are deductible, reducing the cost of repurchases by the tax savings on the contribution. The number of shares in the ESOP remains constant, leaving the ESOP's percentage of ownership in the company unchanged.
When repurchases are handled through redemptions, the trust distributes the shares instead of cash, and the company redeems the shares. The redemption is a non-deductible capital transaction for the company. It reduces the number of shares owned by the ESOP and, except in the case of a 100% ESOP, reduces the ESOP's percentage of ownership relative to the non-ESOP shareholders.
An important consequence of the decision to redeem or recirculate is the effect on the value per share of the company's stock. If redeemed shares are placed in treasury and not reissued, the declining number of shares may have an antidilutive effect on the value per share, i.e., the value per share will rise more rapidly than the equity value of the company, because the equity value is divided by a declining number of shares outstanding. In periods of declining value, redemptions will result in smaller declines in value per share compared to equity value. When shares are recirculated, the value per share will be lower over time compared to redeeming because the equity value will be divided by a constant number of shares.