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ESOP Termination: Why Companies Terminate Their Plans

The number of new employee stock ownership plans (ESOPs) established in any given year is probably between 8% and 10% of currently existing ESOPs, based on NCEO estimates. At the same time, ESOPs terminate for a variety of reasons, bringing the average net growth in the number of ESOPs to approximately 3.3% per year over the past six years preceding the study described here. In other words, the rate of ESOP termination has an effect on the total number of ESOPs that is almost as large as the rate of ESOP creation. For many years, the causes of ESOP termination had not been studied.

This reports linked to below (in PDF format) provide the results of a research project to explore the causes of ESOP termination.

The Phase 1 report (from 2007) is limited to a small number of interviews and is not meant to provide a statistically reliable snapshot of why ESOP companies terminate their plans. As qualitative data, this research suggests which potential causes of ESOP termination are worthy of further study and which do not seem to be. The interviews also provide stories for a number of companies that formerly had ESOPs and the insights of the leaders at these companies. The interviews, in other words, allowed us to probe in depth, providing us with a better idea of what questions to ask. Given the limitations of this study, however, two overall trends do seem fairly clear. First, the most common reason for termination is being acquired, usually because there is an offer too good to turn down. The second most common reason is an inability to handle the repurchase obligation. Some observes have feared that ESOP repurchase obligation will ultimately be the undoing of a significant percentage of ESOPs. The relatively low rate of ESOP terminations (it is about in line with that of other benefit plans) and the secondary importance of the factor in this small sample suggests this is overstated.

The followup article (from 2008) discusses data gathered from 23 large plan administration and ESOP advisory firms. They are collectively responsible for over 3,300 plans, and reported on about 500 terminations.

Read the Phase 1 report (PDF format)
Read the followup newsletter article (PDF format)


Also see our publication Terminating an ESOP: Valuation and Fiduciary Issues.

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