How to Choose Employee Ownership Consultants
3. Choosing a Lawyer or Plan Design ExpertIn most cases, the attorney will draft your plan documents, keep you apprised of changes in the law that require plan amendments, provide legal advice about plan design and operation, and coordinate the transaction (you can, however, also choose a financial advisor to coordinate matters). A company creating an ESOP should always use a law firm for plan drafting, etc.; a company creating a broad-based equity option plan might use a specialist in designing these plans who is not an attorney, but have an attorney review the plan. (For simplicity, we will assume here you are using a law firm, but if not, you can make a mental substitution for "plan design expert.")
The most important initial task of the law firm will be to draft plan documents. This should be a participative process. Most attorneys will have a standard plan they will apply to your situation, so writing the document is itself not time-consuming. Instead, time will be spent working with you to establish the attributes of the plan, such as allocation, vesting, voting, distribution, equity award exercise, and governance rules. The more you know in advance about these issues, the more the plan will conform to what you really want and the less expensive the attorney's fee will be.
- The plan document and transaction documents are usually drafted by counsel hired by and working for the company, not the ESOP. In any case, however, the ESOP trustee should have its own counsel, representing the interests of the plan itself and thus the plan participants, even though the company will actually pay the counsel's bill. Additionally, the company's existing corporate counsel may be involved to a greater or lesser extent, and the selling shareholder(s) may be represented by their own counsel. The degree to which separate counsel are needed depends on the complexity of the transaction, who the parties are, their degree of sophistication, and which lawyer(s) can cover multiple bases while adequately representing the parties. Most of the time, the transaction is between the ESOP and the selling shareholder(s), so the company is not negotiating, but the sellers may well need to be represented by counsel, which, due to conflicts of interest, may need to be independent from the company's corporate counsel.
- Loan documentation is an area that varies considerably in ESOPs. Some lenders are willing to forego or pay themselves for any of the legal opinions that accompany business loans of this type. These lenders tend either to already have done a lot of ESOP loans and be comfortable with them and/or are simply being aggressive in pursuing the loan. Most of the time, however, loan documentation will be required as part of any leveraged ESOP, much as it would be in any other highly leveraged transaction.
- Sometimes a company's main point of contact when setting up the ESOP is a general consultant (who is not an attorney) acting as a "quarterback." If you do this, be sure you know who the law firm is and that you have direct access to the attorney or attorneys working on your ESOP.
Equity Compensation Issues
- Some companies have staff members who can develop the basic plan document in-house. At a minimum, however, companies will need an experienced in-house or hired attorney to review or help design the plan. Often, an accountant and/or a compensation specialist also will review the plan. Generally, the bigger the company and more complex the plan, the more people will be involved in its design. Less experienced companies may wish to hire any or all of the above professionals to play a more active role in plan design. Also, because equity compensation plans raise important accounting issues, you want to make sure your accounting firm is very knowledgeable about this area; if not, it makes sense to hire additional expertise, at least to set up a workable approach.
- Many companies giving broad-based equity awards will have overseas operations and may want to include these employees in a global stock plan. Because of the complexity of international laws on this subject, it is important to hire an expert in the field of global plans to help navigate through this.