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Terminating an ESOP: Valuation and Fiduciary Issues

An NCEO Issue Brief

(Digital Version)

by Gregory K. Brown and Brad Van Horn

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There are many mature ESOPs, and as time goes on various plans are terminating for a number of reasons, ranging from the sale of the company stock or assets, liquidation, high plan costs, and other factors. When making this decision, it is crucial to avoid wrongful terminations, consider all the relevant issues, and weigh the alternatives. This issue brief, written by experienced legal and valuation authorities, discusses the various issues and their implications.

Publication Details

Format: PDF, 19 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (August 2013)
Status: Available for electronic delivery

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Contents

Possible Reasons for Terminating an ESOP
Possible Consequences of Wrongful ESOP Terminations
Parties Typically Involved in an ESOP Termination
Who Should Be the Trustee in an ESOP Termination?
Fiduciary Issues Faced by the Trustee
Sale of Financed Shares
Voting Issues
Distribution Issues
Excise Tax
Rollover Alternatives
Evidence of Good-Faith Negotiations
Valuation and Fairness Issues
Public Stock Deals
Additional Examples of ESOP Terminations
Terminating an ESOP After All Stock Has Been Allocated
Terminating an ESOP with Unallocated Stock
Repayment of ESOP Loan with Sale Proceeds
A Word of Caution
Relevant Case Law
Steps to Terminating an ESOP by Corporate Redemption
Freezing Instead of Termination
Partial Termination
Converting an ESOP to a Profit Sharing Plan
Process of Converting an ESOP to an Existing Profit Sharing/401(k) Plan
About the Authors

Excerpts

From "Possible Consequences of Wrongful ESOP Terminations"

Great care should be followed in terminating an ESOP plan because the consequences of an improper plan termination can be severe. Persons unaware of the many fiduciary concerns surrounding the termination of ESOPs could find themselves in violation of laws they never knew existed.

From "Fiduciary Issues Faced by the Trustee"

Trustees, together with the company, may need to decide whether to distribute stock to participants or to sell the stock and distribute cash, if this issue is not resolved by referring to the company's articles and bylaws. The company's articles and bylaws will indicate the existence of any restrictions on the transferability of the stock or rights of first refusal to purchase the stock.

Another important issue for consideration in the sale of employer stock is the right of participants to receive distributions in the form of employer securities. ESOPs generally must permit participants to take distribution in employer securities, but when the stock is sold, the plan will hold property other than employer securities. It thus seems anomalous that this right to a distribution of employer securities would continue.

However, the anti-cutback regulations provide that such a right generally may not be eliminated. The regulations do provide that certain terminating plans which offer a stock distribution right may be amended to eliminate prospectively that right if, upon termination, a current right to receive employer securities is provided. However, in most sale situations, it is inappropriate to offer such a current right.