Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

Can the ESOP trustee pay more than fair market value if it decides the transaction is nonetheless worthwhile for employees?

An ESOP can never pay more than appraised market value for the shares. Sellers may be unrealistic in their assumption that they could sell the stock for more money elsewhere, however. If they want to maintain a controlling interest in the company, any other buyer will also want a hefty minority discount (if, indeed, any buyer can be found). The ESOP could pay more if the sellers are willing to give the ESOP additional rights, such as a higher dividend on the stock (this would probably require converting ESOP shares to preferred or super common, and may not be possible in an S corporation), a right to buy control over time, tag along rights if the sellers do sell to someone else, or other rights.

While the ESOP cannot pay more than appraised fair market value, the company can redeem shares for somewhat more. This scenario typically comes up in companies partially owned by the ESOP. Because 100% ESOP owned S corporations do not pay income tax, there is significant added value for the ESOP if a company moves from a less than 100% C or S ESOP to a 100% S ESOP. In this scenario, the company would redeem shares from the owner at an agreed price. The trustee would have to determine that the transaction was fair to the participants in the ESOP and could do so if the added extra value of the conversion to a nontaxable entity justified the additional amount.

For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.

Link to this FAQ Topic: Governance, Fiduciaries & Compliance