Reich Announces New Effort to Set Guidelines for Multi-Investor Leveraged Buyouts

One of the trickiest issues for ESOPs has been how to value different kinds of investments in multi-investor transactions. If the ESOP borrows money to be repaid out of future earning, while other investors put in cash, should each get a dollar's worth of stock for each dollar pledged? That has been the Department of Labor's view, and it has received some support in the courts. Practitioners universally agree it is impractical, however, and has made leveraged ESOPs that needed equity investment much harder to do, although these transactions still occur.

At the Worker Ownership Institute meeting, Secretary Reich, in response to a question, agreed to direct the Department to develop guidelines for how these transactions could proceed. That was tried unsuccessfully in the 1980s, however, and many people are skeptical that it will be possible now either.