ESOPs

Boylan Brown attorneys have more than 80 years of combined experience in the Federal and state tax law and ERISA requirements that govern ESOPs. We represent owners who sell to ESOPs, corporations who sponsor ESOPs and all types of ESOP trustees and fiduciaries, including inside trustees, independent trustees, institutional trustees and trustees directed by an independent fiduciary registered as Investment Adviser under the Investment Advisers Act of 1940. We have performed the legal work necessary for companies to establish, maintain, and benefit from ESOPs ranging in size from $500,000 to $200,000,000. Boylan Brown is a member of the ESOP Association and the National Center for Employee Ownership (NCEO). The Boylan Brown ESOP team is comprised of Robert E. Brown, Robert F. Schatz, Richard A. Glassman, Mark R. Kossow, Paul S. Fusco and Karla D. Wilsey.

Is an ESOP right for you?

An Employee Stock Ownership Plan (ESOP) can be an important tool for succession planning and exit planning in family businesses and other closely held businesses. ESOPs can also be used as a finance and employee ownership tool in large or small public companies. (Scroll down for a brief description of the advantages and disadvantages of ESOPs, focused on their use in closely held businesses. If you believe you are interested in using an ESOP in a public company, please contact a member of our ESOP team to see how we might help you.)

When one or more owners of a closely held business decide that they want to sell all or part of the ownership interest in their business, they have a number of alternatives in addition to using an ESOP.

They can sell the business outright. They can bring in outside investors. They can sell to key managers (MBO), they can go public (IPO) or they can begin a charitable and/or non charitable giving program to divest themselves of their interest. Of course, they may decide that an ESOP is the best route to take.

(With the exception of the IPO, these alternatives are well described in an excellent book by John Leonetti, “Exiting your Business, Protecting Your Wealth – A Strategic Guide for Owners and Their Advisors” (Wiley, 2008). John’s book is available at www.amazon.com or through John’s website, www.pinnacleequitysolutions.com.)

The Boylan Brown ESOP team collaborates with other Boylan Brown lawyers to determine with you which alternative best meets your needs. If an ESOP is not right, we will help you design a succession strategy that produces the results you and your family desire. We do not “sell” ESOPs. We guide clients to their best exit plan.

What are the advantages of using an ESOP?

ESOPs have many advantages:

An ESOP creates a tax-sheltered private market for the shares of a closely held company. One of the problems that entrepreneurs and family business owners face is that there is no convenient market for their shares. This means that it is very hard for them to sell only a part of their business. They may want to liquidate some of the personal wealth that is trapped in their company without selling the whole company. They often want to do this in order to reduce the risk to themselves and their families of having “all their eggs in one basket”.

The selling shareholder can usually retain substantial control over the company that is now partially or wholly owned by the ESOP. The selling shareholder may not want to give up control of their company to an outside buyer who may not continue the business and personal philosophy.
By selling to an ESOP the selling shareholder will be able to protect the legacy of the business they have built and nurtured. The company will not become an anonymous division of an absentee buyer.
Using an ESOP can help the selling shareholder protect the valued employees of the company. The selling shareholder may want to protect their employees from the layoffs that usually result when third party financial buyers purchase closely held companies.
By selling to an ESOP, the shareholder may be able to postpone or eliminate any capital gains tax on the sale.
The company may be able to obtain substantial tax benefits that enable it to reduce the cost of its borrowing both for the ESOP purchase of the shareholder’s interest and in for its general corporate borrowing. In essence, repayment the principal of loans taken out by ESOP companies may be made wholly or in part with pre-tax dollars. Contributions to an ESOP generate tax deductions that can be used to offset the cost of corporate loans.
Employees of the ESOP owned company will have a substantial, tax sheltered retirement benefit that will grow with the growth and prosperity of the company.

What are the disadvantages of using an ESOP?

ESOPs can be expensive to implement. They are complex plans, and they require a number of professional advisors, including accountants, valuators, and attorneys. Even so, the expense of implementing an ESOP is generally not more than the cost of implementing any other succession or exit strategy. Boylan Brown can assemble a cost effective team of advisors to suit your particular needs and financial situation.
ESOPs require the company to follow good corporate practices that are often ignored in closely held companies.
ESOPs require annual valuations and careful recordkeeping. Generally, the annual valuation is much less expensive than the original valuation at the time of the sale. Boylan Brown can introduce the company to ESOP savvy third party record keepers (TPAs) who can keep good records for the plan.
Periodically, Congress changes the rules governing ESOPs. These changes are almost always quite small, but they usually require amendments to the ESOP Plan and/or Trust documents. Every five years, the company must submit the ESOP Plan and Trust documents to the Internal Revenue Service for a review of the plan provisions. Preparing the amendments and submitting the Plan and Trust documents to the Internal Revenue Service usually incur some legal costs.
The company and the ESOP must make provisions to buy out the accounts of employees who die, become disabled, retire or are separated from service. The company should undertake a “repurchase liability study” on its own or with the help of its TPA.

The preceeding article is a brief and necessarily incomplete description of the ESOP, its advantages and disadvantages. The more than 11,000 ESOP owned companies in the United States and the shareholders who have sold business interests to these ESOPs are a testament to the power of this unique transition tool. The real answer to whether an ESOP (or some other succession plan) is right for you can be determined only by a complete and sophisticated feasibility analysis that is tailored to your individual circumstances. Boylan Brown’s ESOP team can assemble the right advisory group to help you find the answer for your business, your family and you.

Please contact any member of our ESOP team listed below if you wish to discuss how ESOPs or other succession/exit planning techniques might work in your own particular circumstance.

Our ESOP Team:

Robert E. Brown (rbrown@boylanbrown.com) is a founding partner of Boylan Brown and began practicing tax law, corporate finance law and employee benefits law three years prior to the adoption of ERISA in 1974. From 1978 to the present, he has been a member of the executive committee of the Tax Section of the New York State Bar Association where he has chaired various subcommittees, including the Committee on Employee Benefits. He was a member of the New York State Bar Association Special Committee on Pension Simplification and has spoken at many seminars including the National Tax Association - Tax Institute of America Sales and Use Tax Seminar, the New York University 47th Annual Institute of Federal Taxation and the New York University 50th Annual Institute on Federal Taxation and the ESOP Association. He is author of A Checklist for the Planning and Drafting of Shareholder Buy-Sell Agreements, Proceedings of The New York University Fiftieth Institute on Federal Taxation, Matthew Bender, 1992. He also is a co-author of “Basic Fiduciary Guidance for the ESOP Trustee in Corporate Finance Transactions,” New York University Review of Employee Benefits and Executive Compensation, Matthew Bender, 2006, and a co-author of “Insulation from Environmental Liabilities for ESOP Trustees,” New York University Review of Employee Benefits and Executive Compensation, Matthew Bender, 2007. He has been listed in The Best Lawyers in America (taxation) since 1993. Rob is a graduate of Oberlin College, cum laude, and Yale Law School.

Robert F. Schatz (rschatz@boylanbrown.com) practices commercial finance and corporate law, concentrating in the areas of corporate acquisitions and divestitures (particularly those involving employee stock ownership plans (ESOPs) and other qualified and non-qualified plans), as well as structuring and documenting secured and unsecured leveraged financing transactions on behalf of lenders, investors, corporate sponsors, stockholders, employee groups and fiduciaries. Rob works extensively with corporate issuers, their Boards of Directors, management, stockholders and ERISA fiduciaries in connection with the design and documentation of ESOPs, as well as stock option, phantom stock and other equity-based/performance-based deferred compensation plans and arrangements, and with matters relating to corporate finance, corporate responsibility and fiduciary matters.

Richard A. Glassman (rglassman@boylanbrown.com) has more than 30 years of experience in law, banking and general management in both publicly-traded and closely-held companies. During Rich’s 20-year career in commercial banking in Connecticut and Massachusetts, he specialized in mergers and acquisitions, federal and state regulatory compliance, employee benefit plans, energy-related project finance and international shipping finance. In 1995, Rich transitioned to the private sector, and became the President and COO of a “top-25” travel management company which had more than 35 offices around the country and sold more than $150 million of travel services on an annual basis. In 2004, Rich returned to the practice of law as a partner in Schatz Law Offices, specializing in the areas of banking, finance and corporate law, employee stock ownership plans (ESOPs) and mergers and acquisitions.

Mark R. Kossow (mkossow@boylanbrown.com) is a partner at Boylan Brown, focusing his practice on ESOPs and taxation. He specializes in representing corporations, trustees and selling shareholders in leveraged transactions involving employee stock ownership plans (ESOPs). He utilizes his expertise in ERISA and tax law in order to effectively represent clients in ESOP deals, and also represents clients in both corporate transactional and employee benefit matters. Mark has significant additional experience with 401(k) plans, tax controversy and tax planning matters. Prior to joining Boylan Brown, Mark was a partner at Steiker, Fischer, Edwards & Greenapple, P.C. He is a graduate of New York University School of Law (LL.M – taxation), Albany Law School of Union University, and the University of Michigan. He is a contributing author to New Jersey Limited Liability Company Forms and Practice Manual (Data Trace Legal Publishers, updated through 2003), and the author of New Treasury Regs Expand Public Access To Tax Exempt Organization Information, (The Garden State Focus, August 1999). Mark is a frequent lecturer on topics relating to ESOPs, ERISA, and tax matters.

Paul S. Fusco (pfusco@boylanbrown.com) is as an associate in the firm’s Business & Corporate Practice Group, concentrating his practice on tax and employee benefits law, with a particular emphasis on all matters related to ESOPs, including their design, maintenance, correction and termination, as well as the fiduciary duties related thereto. He is a co-author of “Basic Fiduciary Guidance for the ESOP Trustee in Corporate Finance Transactions,” New York University Review of Employee Benefits and Executive Compensation, Matthew Bender, 2006, and a co-author of “Insulation from Environmental Liabilities for ESOP Trustees,” New York University Review of Employee Benefits and Executive Compensation, Matthew Bender, 2007. Paul received his B.A. degree, summa cum laude, from the State University of New York at Albany, and earned his law degree, cum laude, from the State University of New York at Buffalo Law School, where he was an Articles Editor for the Buffalo Law Review.

Karla D. Wilsey (kwilsey@boylanbrown.com) is Of Counsel to Boylan Brown. She adds a unique perspective and set of skills to our ESOP team, having previously spent 25 years as Vice President and General Counsel of a family-owned business. During that tenure, she monitored the valuations of closely-held companies; served as an ERISA fiduciary for employee benefit plans; was involved in recapitalizations, reorganizations, stock purchases, repurchases, and redemptions; oversaw mergers and acquisitions and handled post-acquisition transition issues; and served as the management liaison for employees regarding employment issues, benefit plans, and various strategic matters.

All of the attorneys on our ESOP+ Team are members of the ESOP Association and the National Center for Employee Ownership (NCEO).

Representative Transactions:

The following is a list of some of the transactions in which Boylan, Brown’s ESOP Team have been engaged with an indication of the size of the transaction, the nature of the representation, and the firm’s role.

Private Company: Represented individual ESOP trustee in $1,600,000 leveraged purchase of 24% of company stock.

Private Company: Represented independent ESOP trustee in $14,000,000 partially leveraged and partially seller financed purchase of 100% of company stock.

Private Company: Represented company in establishment of ESOP and $4,375,000 leveraged purchase of 22% of company stock.

Private Company: Represented company in establishment of ESOP and $3,800,000 purchase of 100% of company stock.

Private Company: Represented independent trustee in $1,375,000 purchase of 30% of company stock.

Private Company: Represented company in establishment of ESOP and $52,000,000 transaction.

Private Company: Represented plumbing Company in establishment of ESOP and $3,000,000 purchase of controlling interest.

Private Company: Represented company in establishment of ESOP and $2,350,000 purchase of 33% of company stock.

Private Company: Represented independent trustee of ESOP in $9,000,000 purchase of 47.5% interest in health care company stock.

Private Company: Represented individual trustee of ESOP in $244,125 purchase of remaining 10% ownership of company stock

Private Company: Represented individual trustee of ESOP in $500,000 purchase of minority interest in company.

Private Company: Represented company in establishment of ESOP and $8,000,000 purchase of 100% of company stock.

Private Company: Represented company in establishing non-leveraged ESOP.

Private Company: Represented professional engineering company in establishment of ESOP and $3,000,000 purchase of 100% of company stock.

Private Company: Represented independent trustee of ESOP in $43,000,000 purchase of 100% of company stock.

Private Company: Represented company in establishment of ESOP and $7,500,000 purchase of company stock.

Private Company: Represented individual ESOP trustee of ESOP in making tender offer to over sixty company shareholders.

Private Company: Represented company in establishment of ESOP and $3,200,000 purchase of company stock.

Private Company: Represented independent trustee in tender offer and purchase of $135,000,000 of company stock.

Private Company: Represented company in establishment of ESOP and $10,000,000 purchase of company stock.