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By: Rebecca G. DiStefano and Jeffrey S. Kahn, Greenbert Traurig, P.A.
This market trends article covers employee stock ownership plans (ESOPs), which are a combination of a tax-qualified retirement plan and a corporate finance tool, and addresses recent trends in ESOPs relating to the design and structuring of the transaction, setting the price of the ESOP shares, and governing the post-ESOP company. Although sometimes misunderstood, ESOPs can be a very effective form of exit strategy and corporate succession structure for family-owned and closely-held businesses in the United States.
AN ESOP IS A FORM OF EMPLOYEE RETIREMENT BENEFIT plan governed by the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA)1 that is designed to invest primarily in securities issued by the employee’s company or the sponsoring company. Although an ESOP transaction is not always considered by closelyheld business owners ready to sell, studies show ESOPs have significant potential to create economic stability, provide significant retirement benefits for employees, and increase corporate growth, while at the same time providing business owners a gradual exit and source of liquidity. Provisions of the IRC give businesses and employees major tax incentives to establish ESOPs.
Benefits of ESOPs
According to the non-profit National Center for Employee Ownership (NCEO), which tracks economic trends in employee ownership:
It should also be noted that unlike other defined contribution plans governed by ERISA (like 401(k) plans), retirement benefits under ESOPs are 100% company-funded and employees do not invest any of their own funds.
To read the full practice note in Lexis Practice Advisor, follow this link.
Rebecca G. DiStefano concentrates her practice at Greenberg Traurig in the areas of securities regulation, corporate finance, and mergers and acquisitions law and serves on the firm’s Blockchain Task Force. Rebecca counsels public and private companies in private placements (including tokenized securities offerings), registrations, and crowdfunding under the JOBS Act of 2012 and the Securities Act of 1933, continuing disclosure requirements of the Securities Exchange Act of 1934, initial and continued listing of securities on the stock exchanges and electronic quotation systems and the creation and organization of non-U.S. regulated pooled investment vehicles including hedge funds, private equity funds, venture capital funds, and funds of funds. Rebecca regularly represents clients in structuring and executing leveraged and non-leveraged ESOP transactions and assists her ESOP clients in corporate governance best practices on an ongoing basis. Jeffrey S. Kahn is a member of Greenberg Traurig’s Global Benefits and Compensation Group and is Co-chair of the firm’s ESOP Practice Group. A member of the New York and Florida Bars and rated AV Preeminent by MartindaleHubbell with more than 30 years of broad employee benefit experience, his practice focuses on retirement plans and the design and implementation of Employee Stock Ownership Plans (ESOPs). A noted speaker and author, Jeff frequently speaks before professional, charitable, financial, and business audiences on ERISA, ESOPs, and other employee benefit subjects. Jeff is listed in the 2010-2018 editions of The Best Lawyers in America in the category of Tax Law.
For an overview of fiduciary duties under ERISA, see
> ERISA FIDUCIARY DUTIES
RESEARCH PATH: Employee Benefits & Executive Compensation > Health and Welfare Plans > ERISA and Fiduciary Compliance > Practice Notes
For additional information on fiduciary liability issues, see
> EMPLOYER SECURITIES AND REAL PROPERTY ERISA INVESTMENT RULES
RESEARCH PATH: Employee Benefits & Executive Compensation > Retirement Plans > ERISA and Fiduciary Compliance > Practice Notes
To learn about designing a compliant employee stock ownership plan, see
> EMPLOYEE STOCK OWNERSHIP PLAN DESIGN AND COMPLIANCE
RESEARCH PATH: Employee Benefits & Executive Compensation > Incentive and Equity-Based Compensation > Equity-Based Compensation > Practice Notes
For a sample employee stock ownership plan for a U.S. privately-held company, see
> EMPLOYEE STOCK OWNERSHIP PLAN (PRIVATE COMPANY)
RESEARCH PATH: Employee Benefits & Executive Compensation > Retirement Plans > Design and Implementation > Forms
1. 29 U.S.C.S. § 1001.