If a company takes on new debt through the ESOP to buy additional shares, how can interests of employees be protected?

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When a company takes on additional debt to repay a new ESOP loan, employees who stay with the company will see a lower stock value but, eventually, more shares and, once the loan is repaid, the value should recover or do better if the company's earnings meet expectations. People leaving in the next few years, however, do suffer a dilution in value. Some companies deal with this by paying departing employees an extra bonus to make up part or all of the difference between their pre- and post- new ESOP debt.More commonly, companies create a floor price protection plan. Typically, this would entail providing that employees who are scheduled to receive a distribution over the next x years (often five) will get not less than the value of the shares when the loan was taken out. This should be adjusted, however, to reflect any decreases in value that occurred outside the debt factor. For instance, say the share price was $100 when the new debt was taken on and is $72 when the employee gets a distribution. An appraisal firm concludes, however, it would only be $90 if there had been no debt. The employer then makes up the difference at $18 per share, not $28. If the share price is $101 or higher at distribution, no adjustment is made. Many companies limit this floor price protection to people over a certain age, such as 55.A second approach allocates all of the debt for the second ESOP loan to the shares acquired by that loan. That way, the existing shares retain their value. As the second loan is repaid, the debt effect will be removed from these shares and the share prices of the two groups of shares will converge.For more details, see The ESOP Repurchase Obligation Handbook.