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Innovative ESOP Transaction Structures
An NCEO Issue Brief
by Peter Abrahamson, Gregory K. Brown, Neal Hawkins, Matthew J. Hricko, Patrick Kane, Robert Ruszkowski, Stan Slabas, and Domingo P. Such III
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Format: Perfect-bound book, 28 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (February 2014)
Status: Available for electronic delivery
Two Innovative Transaction Structures for ESOP Companies
Structure A: Use of Profit Sharing or 401(k) Funds
Structure B: Use of the ESOP for an Acquisition
Alternative Forms of Capital
Types of Alternative Capital
Providers of Capital
The Use of Alternative Forms of Capital in ESOP Transactions
Case Study: ABC Manufacturing Company
ESOP Internal Loan Stretch-Out Transactions
Department of Labor Stretch-Out Guidelines
Dividend Make-Whole Protection
Other Typical Stretch-Out Inducements
Valuation Impact of a Stretch-Out Transaction
Stretch-Out Transactions as Part of Corporate Transactions
The Tender Offer Process
Overview of Tender Offers
Tender Offer Preparation and Execution
Required Disclosures in Tender Offers
Private Equity and ESOPs: A Creative Combination
About the Authors
From "ESOP Internal Loan Stretch-Out Transactions"Event protection is a common design element in stretch-out transactions and is generally always incorporated into a stretch-out agreement. Event protection provides that in the event of a major corporate transaction or event, such as a sale, merger, recapitalization, or termination of the ESOP plan, the original terms of the internal loan are to dictate the use of suspense shares to repay the internal loan. The purpose of event protection is to provide that the ESOP trust and the plan participants will not be harmed or worse off should a major event occur after the internal loan is refinanced and before the final maturity of the new internal loan.
For example, the ABC ESOP has 1,200,000 shares, 800,000 of which are allocated and 400,000 of which are unallocated. The outstanding balance of the existing internal loan is approximately $5 million. The terms of the internal loan dictate that ABC will release 80,000 shares per year and that over the next five years all of the unallocated shares will be allocated according to the terms of the existing internal loan. Event protection would dictate that this original release schedule would be in effect for purposes of calculating the suspense shares that could be used to repay the outstanding balance of the new internal loan in place after a stretch-out transaction. After five years, none of the shares in the suspense account for the ABC ESOP could be used to repay the new internal loan because the original loan would have fully released the shares. Rather, all suspense shares would be allocated to participant accounts with the internal loan forgiven by the company and/or satisfied by additional contributions or dividends.