EP5 - Selling an Employee-Owned Company - Discussion with Greg Daugherty ESOP Attorney

In some cases an ESOP company can choose to sell to an outside buyer after they transition to an employee-owned company.  In this episode Greg Daugherty, Porter Wright and, I discuss the factors related to selling your company after it has become an employee-owned company.  Greg does a great job of discussing how this process works and what business owners should know as it relates to the board of directors, trustees and, support related to selling the business. 

Transcript

[0:14] Hey everyone this is the journey to an ESOP and Beyond podcast where we talk about Employee Stock ownership plans both from a pre-op and a post-op perspective in order to help people really better understand uh what this is all about in a way that really kind of helps them ask good questions and helps them to either structure their esot better or work through post-op issues as they as they come up, so we're excited to interview Greg Daugherty today he has been on the podcast years ago so we're we've invited them back on or super excited to have Greg he's with Porter Wright uh Greg welcome to the podcast again thanks thanks for having me back Phil, awesome so Greg um real quick just to kind of reintroduce you to the the audience from your perspective I know you do as an ESOP attorney you do a lot with erisa you work with trustees to represent them on either ESOP transactions or even host ESOP issues and then you work also on the company side when we say that we mean hey you work with the companies to to create the plan and then the ongoing erisa Consulting as well from a legal perspective.

[1:24] Yep that's right I've been I'm a partner at Porter right here in Columbus Ohio been practicing for a little over 20 years now and yes my background is in odisha and executive compensation that's how I got into the ESOP space, and so yeah depending on the transaction sometimes companies will have us represent them to help. Form the ESOP get through the the sale transaction becoming ESOP owned and then help with the ongoing, erisa compliance afterwards and then sometimes trustees asked us to represent them on the buy side of an ESOP transaction, sometimes Banks even asked us to represent them on the loan document a piece for a niece op transaction that's true too I forgot how that that angle so there's a lot of different places in roles which gives you a good insight and makes you a great, uh person to have on our podcast because there's a lot to talk about um I would I would.

[2:19] Be um I guess I have to congratulate you guys I guess I don't know if you're a buckeye fan or not but I am Buckeye yeah I am I went to law school at Ohio State okay so I suppose it's it's it's appropriate to say congratulations for beating Notre Dame sorry for Notre Dame people but it is what it is right, ex exactly although congratulations to Notre Dame for somehow becoming The Lovable underdogs, never thought I'd see that day if I know what is going on in the world so um and it's not all about football right so um but but really cool so I'm I'm thankful that you're here today to talk through this a little bit so our topic today is going to be um the anticipating a potential sale or what happens if you're you're setting up your ESOP whether it's a partial or it's 100% ESOP what happens if if the company gets approached to uh be sold and that could be any kind of strategic buyer as we talk about it could be a private Equity Group it could be uh a competitor it could be anything and so as as we say that I Al I always want to kind of give some of the foundational things like it when you sell your company to an ESOP it doesn't mean you're completely going to be an ESOP forever right and a lot of times, um Greg in your perspective and I think I I've talked about this with other other people too um that's not always the endgame anyways right so sometimes people are doing this and they're thinking well maybe I'll sell it later down the road how often does this happen just kind of on a high level perspective from your experience in doing ESOP work.

[3:48] It it's fairly often maybe not quite as many I think there's still more formations being sold to an ESOP than there are ESOP companies being sold but the numbers are actually fairly close, uh closer than what you, yeah I think that I mean when you look at the like the numbers like the NCO publishes the numbers of of ESOP companies nationally and I think we're kind of in that 6500 number kind of normal, and years and years and years it just stays that like right and so in Furs is that there's always companies coming in but there's companies going out as well, yeah exactly like well so he's gonna be more and more ESOP companies so we know that there's more um we know that there's just this ongoing sales so we know this is a reality for a lot of the companies right, yeah and it's not a bad thing either I mean, like a good example is a New Belgium Brewing where they wereESOP 100% ESOP owned and, I mean they were great they'd go to a lot of the different and CEO ESOP Association conferences they had a great culture and then.

[4:52] It was bittersweet because I think 2 or 3 years ago they sold danheiser Bush and. 1 hand it's kind of sad that they're not an employee owned company anymore but then on the other hand and eyes are Bush made a great offer and so all those participants in the ESOP. I mean they were shareholders so they got a huge windfall and they got a Payday yeah yeah set up very well for retirement. Yeah I mean it's so it's like you said it's it's it has to be like a depend it depends if it's good or not good but in general what would you say our our areas where you would say that's a good it's a good thing we already kind of covered the participants get paid well um in general where would that be a good thing for people or companies to look at a positioning for a potential sale down the road. I would say1 of 1 of 2 things and they're both related so 1 isare you still growing or not. I mean if you're not if the company hasn't been growing in a long time.

[5:52] That's not necessarily a reflection on you maybe it's just with the resources you have in your size.

[5:58] There may be only so much you can do and if you if you sell or you you merge into another company then being part of a larger company May.

[6:09] Give you more resources to to grow to the next level that you just wouldn't have on your ownthe related. Part of that you know with some overlap isand a lot depending on your industry there's a lot of consolidation it's just seems like in a lot of things. Fewer large corporations or entities dominate that particular sector and so it's tough to be an independent company. I think esops make it a little easier because you can attract people who might otherwise go to large companies but at some point.

[6:45] It's just tough to compete with the big guysand you may decide at some point that.

[6:53] We can fight this battle or we can join them. And again maybe it's a company that gives us more resources and maybe you know look at their culture too maybe there's a strategic buyer that. Treats their employees while but again it's you're kind of looking more what's the long-term growth or what's the long-termvision for the company and if you think. Given the resources we have there's only so much more we can do or there's not much more we can do then maybe it's appropriate, to consider a sale to the right party in every in every company I think too like as you're saying it it's subject to a cycle and the cycle is the large cycle as I start up, I have a growth cycle eventually a mature and then I go into that declining stage which we have to be realistic I mean companies get into that and then they're just going now the valuation is going down too so timing line.

[7:45] You know to be in that mature stage you have to be objective and say look this is this is what we can do next um 1 of the thoughts I had as you talked was like I know technology is a big problem and that problem or an issue or concern. Because it's changed so quick right and so how does any adopt technology because it does require so much more Capital into.

[8:07] Um but we we're all seeing 2 just kind of the throw out a Nuance of we're seeing a lot more private Equity get involved in esops too because there is a requirement of of a lot of capital sometimes and that that kind of hybrid I think private Equity is finally starting to realize this is such a good deal too because you do get the empowerment of employees and there is a longer term aspect of it that can help build the the value so um there's a combination of a lot of things happening I I think the interesting part about this topic today is is to break it down like from the standpoint of you have a company that's already set up everything's going great, um the first thing is is kind of like if if a company is going to sell after an ESOP um what's the appropriate like because there are certain fiduciary things we got to be aware of and part of what I'm speaking to specifically to the board of directors that run a ESOP company what are the specific things that they should be aware of as it is like we I think we talked about like um you know hypothetically a company gets called every week by some by, you know do they ignore all those those calls and and just kind of pro policy-wise and and fiduciary wise what what should the board of directors of a ESOP company be thinking about. Yeah so.

[9:22] Take kind of both extremes there's no requirement to respond to everything but also just dismissing every offer out of hand is not appropriate either. And so in an Ideal World the board would come up with a policy and you can call it.

[9:38] Some actually call it the knot for sale policy but basically the board can say.

[9:43] We will respond to all legitimate offers they're all Bonafide offers that's there's no legally defined term as to what that means. Butgenerally. If you get an offer instead of just deleting the email or ignoring the phone call or respond back and say okay thank you for your interest. The general 1 of our corporate purposes is to be an employee owned company but we also recognize there's a fiduciary duty at the appropriate times and so we will respond to Bonafide offers. And to demonstrate that this is a Bonafide offer. Uh give us you know information about the potential buyer we want to see financial statements to know that they actually have the ability to to back this up, you know actually purchase usthat they have a tell us what their history is with Acquisitions did they get deals closed how do they treat the employees afterwards. Can set up a kind of a questionnaire like that and then when you send those questionnaires most of the time. Whoever was trying to gauge your interest just goes away and doesn't want to deal with it. But if there is but if somebody actually does respond to it then the board has a has a fiduciary duty to consider that.

[11:03] Yeah yeah and when you look at the first off like the board of directors is structured with, a specific set of bylaws write that right they kind of require them so within the bylaws is there is it common, let me go backwards a step so before an ESOP and then after an ESOP because you don't have like this formalized board in a lot of these smaller companies right you sell to an ESOP now they do have the board at what point do they adopt the bylaws is it right afterwards and then do they need to really go through those bylaws specifically for things like this. And then of course yeah that's a great yeah that's a great question so usually they will have bylaws set up they'll have amended articles on Corporation and bylaws set up at closing.

[11:48] Because they have to under Most states corporate law but to your point it usually.

[11:55] Usually they they need to take several months or even a year to hire an independent director who hasn't performed services for them or isn't subordinate to the Insiders in some way. And then it's usually when you get that independent director on the board that's when. At the board meeting they'll say okay do we want tohave a policy like this or not and then if so. We can put a provision in the bylaws that say we will.

[12:25] We only respond to Bonafide offers and that the intent you know we view it as 1 of our corporate purposes is not just to. Perform whatever service or private or product but also to maintain our independence and be an employee owned company. But put that caveat that we will respond to Bonafide offersthe the other thing you can do too is you could.

[12:49] Put in your ESOP planthere's a require there's always a requirement to pass through voting for a sale of assets. But only the trustees required to vote on a stock sale but you could put in your ESOP plan that the pass through of the voting has to apply on a stock if private Equity wanted to buy stock for example and again it's a question of.

[13:15] Do you want to do I mean if you do that you make it harder to get a deal done and that you know For Better or Worse do you want to do that or do you want to just leave that decision to the trustee because maybe the trustees. More financial sophistication to evaluate that but the point is you can, you can adopt this policy put it in your corporate bylaws to say okay so if the board acts as consistent with this policy we're acting consistent with our corporate fiduciary duties.

[13:42] And then if you really want to make a.

[13:45] You know kind of really enhance your Independence protections even have that pass through voting in the in the ESOP plan.

[13:53] What so 1 of the things that piqued my interest in in thinking about a Bonafide off or Bonafide offer from a buyer is going to be things like, that that you're going to want to I kind of just call this the filtering process right so the filtering process says I see this offer come in andyou know when you look at the process of of a buyer coming in to buy a company, it's it's obviously a little different than how we sold the ESOP because the ESOP is this negotiated transaction with a trustee in this type of situation, what would be some some I guess some bullet points of of filtering the Bonafide offer obviously the purchase priceum. I'm guessing deal structure right if they're going to come in and you know have this weird deal structure that that doesn't really work either right so what would be some bullet points there that we would want to, so I'd say the the deal structure the the transaction the consideration so not just the PRI the price but are they paying cash or is it.

[14:54] You just get stuck of the of the buyer entity again evaluate certainty of closure. And and again the trustee can do some of this too but it's like what's the future value of the ESOP do we think and kind of compare that to the what's being offered as as part of this purchase.

[15:13] And thenyou can also.

[15:17] You can also shop the company at this point too if you really want I mean you could maybe the first thing you do is respond with that questionnaire but at the same time you'd say well wait a minute this.

[15:28] Even if we think a sale might be appropriate how do we know if we just have 1 offer so maybe talk to. Evaluation advisormaybe even investment banker and say well hey what do you think this. If we were to shop this company and put this company up for bid what would a what would this look like in an m&a deal, try to consider all of those items to say okay is this a legitimate offer is this a serious offer and I, yeah I think it's a good point too because when you think about getting taking 1 offer and saying all right well that's it let's do this um without having some level of comparison like maybe the Market's stronger.

[16:08] And you didn't even know it at that time you know because it's not being picked up yeah exactly and your independent valuation every year because the market value is is specific for your company and that industry so um I think those are those are certainly really helpful I think a lot of times kind of depends on who's on the board you know as far as, their um experience level and and I would say that, I would as as a fiduciary and we'll talk about that in a second but as a fiduciary board memberI'd feel a little nervous just making that decisionyou know without, without some level so when when we say fiduciary to the board what what what I'm saying is I what I mean is that there's a risk that the board takes because they're a board of directors, that says they're responsible just like the trustees responsible from a fiduciary standpoint for the ESOP which is a retirement plan, and they're making these decisions that affect the value of that plan for these employees so their retirement, of the employees is being kind of in the mix of all that material decision that you're making so um let's talk that about that just a few minutes just so people understand like what is the fiduciary responsibility of board of director has you know in general and then we kind of we're connecting back to the sale the potential sale of the company yeah so the the board interestinglytheir decision to sell the company or not triggers state law corporate fiduciary duties.

[17:33] Not the erisa fiduciary duties nowif they decide to get the trustee involved that might change but at the initial level.

[17:42] Is the corporate fiduciary duties which are very similar to the erisa fiduciary duties they have a duty of care and a duty of loyalty. The difference is the duty of care is the ordinary what would an ordinary person, with an open mind and a clear heart do it's not the this prudent expert standard that orisa has but they also have to act solely in the best interest of the shareholders which is the ESOP so it's a very similar duty of loyalty.

[18:10] Butsimilar to the erisa fiduciary duties. They have this kind of presumption that they've satisfied their duties called the business judgment rule where if it's a procedurally sound decision-making process courts will defer to the board's judgment because courts. Don't want to become valuation experts and engage in 2020 hindsight so they just if you can demonstrate that there were no conflicts of interest. No none of the board members had a personal interest or didn't say something like well. Gosh I saw a company I'm not on the board anymore if it's an Insider oh are they going to lay me off so if if you could show that there was no conflict and. And that sense and then again that they they had. Not for sale policy and that they evaluated if somebody did respond to it that there was a decision-making process and that the board meeting they took minutes to explain. This is why we decided to sign the to ask starting negotiations for a letter of intent or just to reject it outright. If you have that procedural process to show that the duty of care was exercised there was no conflictsthat's how the board will satisfy their corporate fiduciary duties, right and you're and you would say like tracking all that in minutes and documentation is helpful to to also provide evidence that they've worked through those exactly yeah 1 thing that just sticks out in my mind and it's 1 of those like.

[19:39] Crazy questions is like if I'm a board member okay let me just give you the scenario I'm I was a shareholder I sold my company to an ESOP I'm on the board very common right because you're, I got the seller note and with the seller note I also have a warrant you know because I've I've structured it in a way that I have this this deferred payment down the road right, does that does that inherently give me a conflict of interest because I'm I'm I I personally just want that thing to keep going so I can Max warrant payment how do I how do I address that I think it could and a lot of times what you'll see is if there is like 1 board member in particular who has a large.

[20:21] Seller note still getting paid or a warrantBop stained from the voting just because it's like you have the appearance of a conflict how can you really.

[20:30] Approve 1 way or another that you're acting in an unbiased manner so abstain and then you havemaybe have another inside director. Who doesn't have that Financial interests and then you have the outside director, and if the 2 of them vote you know 1 way or another that that can show that you took steps to avoid the conflicts, no it's and I think the same thing would hold true with a sar so if I'm a key key manager I'm on the board I've got a nice SAR plan and I'm waiting for that thing to give me you know um spit out some money, um you know those those would be considerations I'm sure that you would want to protect yourself from as a board member right yeah absolutely, so and then I I'm I'm assuming on the other side of the table because the you know 1 of the roles of the trustee has is that monitor the behavior of the board I would I'm assuming that the trustee would really have a responsibility to look at how they made a decision, on thatright rightyeah so that triggers a couple questions so 1 when does the board tell the trustee.

[21:36] No definitive guidance but I thinkthe best practice is.

[21:42] Once you know you have a Bonafide offer so probably before you sign a letter of intent so if you get a fishing Expedition you don't have to run to the trustee every time someone calls or emails, but if you send that questionnaire and then someone actually responds. Then I think it's appropriate to get the trustee involved what informed the trustee hey we have this offer and we're stillworking through it. And then that way they know and then they can preparethe next part is. If if you're internally trustee the in the internal or inside trustee probably needs to resign or at least hire a special fiduciary and outside fiduciary for purposes of evaluating, the transaction again to avoid that.

[22:28] That conflict there and then I would not want to be the internal trustee right yeah yeah exactly right right and then, the role of the trustee it's not that they're really approving or negotiating deal documents it's more they'll let the board. Negotiate the letter of intent. But again there should be communication as there's offers and counter offers because what the trustees going to do is just kind of run its own valuation process. And say okay let's look atwhat's being what's what's being offered for this company. And is that fair can we say we're if we accept this that it's fulfilling our fiduciary dutiesand when we say is this Fair. Part of that is just an absolute terms is the transaction price. In the best interest of participantsand generally that's okay well we know what our valuation is.

[23:29] They're probably offering a premium but the fact that it's a premium in and of itself doesn't necessarily mean that it's it's fair because the trustee is going to say. What's the future growth of this companyand most likely if you sell the company the buyer's going to terminate the ESOP. And then the participants or role there you'll get cashed out and then they'll roll that cash and do. Either the buyer's 401k plan or to a personal IRA and so say okay well we take this transaction consideration now we invested in in a balanced fund or in the broader markets, what does that look like versuswhat if we don't sell what if we just keep reinvesting in employer stock like we would under the ESOP.

[24:13] And again depending as you describe this life cycle if you're early in the life cycle at the start of the growth phase.

[24:20] They may need to be a hefty premium to make that decision to sell or in most cases it may be better off holding the employer stock, I'm gonna figure out a more mature stage. Maybe selling is the is the better deal so so they look at that but then there's also this concept of relative fairness so even if the transaction looks fair to the participants. If there's golden parachute payments for the management team and you know very generous retention bonuses.

[24:49] You know as the management team or the highly compensated employees benefiting disproportionately to the ESOP so the trustee is going to look at both of those items before ultimately deciding whether to, agreed to sell or not, yeah and that and that part um as far as the trustee agreeing to sell or not is is a good is a good place to kind of ask the question because this gets asked a lot.

[25:16] Umwhen you look at what the percentage of the ownership of so we're looking at specifically a partial ESOP and let's just let's just paint a picture that the partially stop is is a non-controlling interest meaning that less than 51%um, so let's use the 51% 49% example first and say, in that case the 51% or is held by 1 or multiple shareholders that are they own that stock privately, they get approached they're like yep we like to do the deal we like this deal um so they're thinking about themselves right I got the max 51% piece um the 49% stockholder is technically the trustee because they're the ones, that technically owned the stock through the ESOPso in that process what would be the the the issue and and we have let's just say that the 51% really want to sell the 49% trustee says no. Um I guess the question is could they kibosh the deal.

[26:19] Maybe so it's going to depend on Deal structure it's going to depend on corporate lawif it's a stock sale. There the trustee. In theory could not stop the sale because if it's a stock sale like there's nothing like any individual can always choose to hold stock or sell stocks with a 51% shareholder, could say I'm selling my stock and ESOP trustee says well I'm not and then.

[26:48] The buyer says well okay now I I own a 50 I own 51% of this company now the question is going to be what a buyer want that. What a buyer say well sure I'm happy to continue to maintain these uh. Yeah maybe they maybe they would I don't know maybe they have no idea maybe they would or maybe they'd say well hey we can always terminate this thing but they probably wouldn't want to.

[27:09] Do that so like they'd probably. Want some some alignment between the trustee and the board there but in theory if you know maybe the but maybe the to your point maybe the buyer says no this is a great employee retention and recruitment tool and, yeah motivates the employees so then we look at this as an incentive plan so maybe they'd say yeah we can work with itif it's. An asset salemaybe again you're going to have to look at the bylaws and you're going to have to look at corporate law because some states. I think some states I think do allow majority just to say yeah we're selling all the assets or other trustee likes it or 49% shareholder likes it or not but some states require 2/3 of. 2 thirds of the shareholders to vote to approve so if you needed 2 thirds and you're not going to get that yeah you wouldn't you know the trustee could. I crushed it you know or put a stop to it there. Is there something you is something you would do like to say that would you some something you do prees offices look I want to put something in my documents. That give the 51% holders the right tosell itis there something kind of that you can do that's not violating odisha.

[28:23] That would be tough yeah I mean I think the trustee I mean the trustee is the shareholder would have to approve of that change and I think the trustee would have to get comfortable somehow, with that kind of satisfied fiduciary duties I don't know if it could, where where would that show up in documents would it be because you don't really have ashareholder agreement with the trust do you like you would a normal.

[28:47] No I mean it would probably show up somewhere in the bylaws or in the Articles of Incorporation. And then the trustee has to prove it right yeah then if you'd make an amendment like that the shareholders approve it so the trustee would have to approve that.

[29:04] In this in this it's obviously there's 49% of pretty big holder of stock anyway but in the event that that as we look at the structure some of these deals some of these companies esops are like. 8020 right 80% private held 20% ESOP or 7030 um in that case is it is it the same level of of of um control because I think we you and I talked a little bit about this idea that in some state law you can basically say hey we we have enough ownership like I guess it's the 2/3 when to it right well there's was that what the asset sale but the other thing is there's this concept called a squeeze out merger or sometimes they're called a cash out merger where, and again you need to look at the state law but a lot of states that magic percentage is 80% and if the the ESOP own or if. If the non ESOP shareholder owns 80%then they can sometimes you have to have a notice of a shareholder meeting to give the ESOP trustee a place to voice.

[30:07] It's concerns but at the end of the day the 80% shareholder. Can then say well I vote to approve this transaction and pursuant to the squeeze out merger statue. Uh any descending shareholder is going to get paid out in cash equal to what we agreed upon as as the transaction price so in that sense.

[30:31] Yes usually 80% there may be some states where it's 90% but you know if you have that threshold you can. You you can force that deal you can basically drag along the the minority descending shareholder yeah yeah and and the stute trustee will be aware of that and if they're acquiring less than.

[30:54] You know 20% of the stock or 20% or less of the stock they may apply a discount just understanding that. They're giving up some shareholder rights and that potential scenario. Right yeah that that that makes sense too I mean we're already going to get hit with a non-controlling or a discount for lack of control for anything less than 51% but they may have a you're thinking they may have a Deeper Discount than that right right, because of the lack of of the control right if they're to Center REITs are less valuable yeah.

[31:27] Um 1 of 1 of the terminologies gets thrown around thrown around a lot so just kind of looking at. ESOP deals is event protection and so how would you how would you explain event protection and and these types of scenarios to. You know somebody setting up a new ESOP or they have an existing ESOP under the event protection rules what's happening exactly when they when they do the sale, yeah I mean I would say it's basically have to act as if all of the shares of stock in the ESOP are allocated to the participants and then. The the participants are then paid accordingly or the transaction price is is paid accordingly so you can'tjust say oh well there's only. You know a fraction of the shares have been allocated and so the bulk ofthis transaction value goes to, warrant holders you know for example oryou know stock appreciation right holders you got to make sure that the ESOP participants are getting the full benefit, that transaction price.

[32:27] Yeah so and and as Greg says that what we're what we're talking about is once you set the ESOP up most of the shares are well all the shares are going to go into the trust those are going to be released over a long period of time using the Insight note and so that share release is typically for 100% ESOP say 30 years or plus um so now what happens with event protection is, say say you're 10 years into the deal right we still have 20 years left in the a stock in the trust those shares get released, and then the value of those Shares are going to be B paid out based on that release um with all the other shares that they had before and then they're going to Value the warrants and then the other things like the SARS after after all that so that there's not like this this higher level value on those types of things so basically that's kind of a standard thing it's just something that people, get to and they're like oh what is that right so it's just always important to be able to kind of spell it outum I get I get this question from people too it's like you do a new deal.

[33:28] And they're like well what happens in you know let's just say that that the deal is kind of a normal deal so you have um senior debt financing that's with a bank, um you have the seller note financing which is subordinate to the senior debt financing and and let's just say that has a warrant to it you have a sar plan with the key people um you have a normal negotiation we go put all that debt on the on the balance sheet for the company um and then everything starts to kind of do it what it's supposed to do right but 3 or 4 years into it right we haven't even invested everybody into the plan yet so you still have like that and their question is what happens if we just sell it in 3 or 4 years um and then it all works I mean we get let's just assume Bonafide offer the trustee yeah um what happens like for instance I mean we're going to get a new purchase price right so when you when you apply that with event protection um just walk that out a little bit with like, the the steps that they go through because it's kind of like we did all this work now we're salt we're sold as an ESOP and we terminate the plan. Right so that's that that's the first question is what is the is the plan going to be terminated or are they going to try to merge. The seller plan and the buyer plan almost alwaysthe buyer's going to say terminate the ESOP distribute the assets to the participants and so then.

[34:50] The the sellers board prepares a resolution to terminate the ESOP you know so when you do that 1 you have to. Prepare any amendments to bring the ESOP up-to-date with with current law so as an example.

[35:04] Secure 2.0 has some amendments required for all qualified plans not just esops. Uh but those amendments aren't due until the end of 2026. So you don't have to amend them this year but if you terminated an ESOP this year you'd have to adopt those secure 2.0 amendments so you do that so you get your ESOP up to date, if it's an individually designed plan you probably file for a determination letter from the IRS to confirm that. The esops qualified its appropriate to pay the participants out.

[35:36] So you get you know you get through that process and then it'sokay what are we going to do now so usually if there's still an inside loan that's usually forgiving. Kind of along with the event protection we're just releasing the shares they're all allocated to the you know participant accounts just consistent with the the plans allocation formula. The husbands have these shares and then we're going to use the deal consideration as the way as the means of Cashing Out The participants. And then.

[36:09] Again question is do you distribute in stock you know again this is why if you're looking at a Bonafide offer a fair offer as the buyer paying cash consideration or is it stock of their company, you know you just feel like you almost need a lot of cash in a deal like that right yeah I mean ideally yeah it's like normally you're gonna say no we need cash like if you're gonna get rid of the ESOP we need cash. And thenthat makes it easier because then it's okay so now the participants get their cash distribution, and then they have the decision whether to roll their those cash distributions over to the buyers, 401k plan or if they want to roll it over uh to an IRA to their personal Ira right because either way they're not going to want to take pay taxes on take it out of their retirement plan, right now 1 of the other issues that comes up is a lot of times there's an earnout or amounts held in escrow or just to until we get through. Usually it's like 12 months or like a financial statement yeah right and then the question is.

[37:14] Can we really do that with an ESOP there's been some do commonalities ever been official guidance but like would that be an in permissive.

[37:23] Extension of credit between the plan sponsor and the ESOP and that's the prohibited transaction.

[37:30] If if you have non eastop shareholders. A lot of times I've seen there's just simply the ESOP gets cashed out right away and the non ESOP shareholders are the ones that their consideration is subject to the hold back or the escrowif it's a 100%. ESOP own companythen I've seen like a limited hold back but it's usually like less than 12 months and it's kind of. Well we got to wait usually takes 12 months to get a determination letter anyway so might be the earlier of 12 months or when we get the determination letter. And that's a buyer sometime just to confirm there's been no breach of reps and warranties. Right right but not unduly delay payment to the participants yeah. And then the same thing goes probably with the payout of the warrant right after all that's done like the seller note gets satisfied. Yeah I'm sure Bank financing then seller note and then of course the warrant gets satisfied right yeah exactly, they saw that and then yeah and like the warrant payment could be subject to the hold back too if there is 1but yeah but you're right I mean typically with these transactions is. Even if the buyer itself doesn't have the cash they'll usually put financing together to say okay we're gonna.

[38:53] Extinguish the seller'sdebt and you know extinguish the warrantcash out the ESOP cash out the SARS. And then there's just 1 loan there's just okay now is the buyer we owe our bank however much and then the bank. Presumably is lending the money because they're saying yeah but you're buying this productive ESOP own company. Even if for terminating the ESOP it's a productive company so it's enhancing the ability to earn income and. Growing your assets so it's you know it's a worthwhile loanthey might keep that in there yeah, so the war the warrant in in that future value when it the valuation itself is the purchase price correct like the warrant now gets valued at that purchase price minus, strike price so yeah somebody could feasibly have a warrant worth a lot. In that deal because they've um yeah I mean because the multiple was so high and they you know whatever I mean 3 or 4 years is probably, not a normal typical thing because it you know. Unless there's some weird circumstance that happens that is it is a question I get asked a lot is like yeah well again 3 and 4 years usually the company's growing so much just by their act of paying down debt so usually.

[40:11] It's just tough to come up with a purchase price that's going to be better than discontinuing.

[40:16] Invested employer stock right and if those are the particulars then it's going to make sense for them to do that, and I think there are there are other like if you go back to the very beginning I mean there are strategic ESOP plans that say hey we we want this to happen I mean we're going to do oh yeah we're gonna use this piece we'll raise some Capital then we'll go out to the markets was a partial ESOP because that's our that's our game plan, because we're, and it's a great benefit it's a great payday to our employees and they're all going to benefit from this yeah everybody wins it's kind of it's more of the strategy as opposed to some you know I think the classic strategy is look we want to do a a legacy business and we want to keep going forever as long as we can because we love our culture and everybody loves it here so I think a lot of times people think that that's the only approach or a sense of the only approach of doing an ESOP but I think that there's so much more going on with that as a tool to get people from a to like wherever they were wanting to go to B to C to D or z um so helpful to understand it better that's for sure. Yeah absolutely I mean in a way the ESOP at that point is kind of functioning as. The way Phantom Equity often functions and 90 stop companies like well hey how do I get sent up by, my key employees to grow this company we're we're a sale looks attractive. Yeah I think for you know just just in the last several years I mean I can't tell you how many conversations I have with people in their 40s and 50s.

[41:43] They're saying hey what can how can I use an ESOP you know it's like so so just saying all that because it's a lot of times I think people have the misconception that, you know you're talking to people that are ready to retire and this is the normal thing so it's there's just so much going on with that which we could talk about like, almost forever but the bottom line is like this was, because it was just like take it block step by step how do we get through this process if it is very common um and it is something that people need to be aware of that you know once you, do all this you know you just have to be aware that that that's a reality and then how's the trustee play a role in that which is another thing oh I want 1 question I didn't ask you is real quick like because this gets asked to the employees I mean the trustee represents the employees, the employees can vote on the sale through the trusteebut how often is it where I mean ultimately the trustee has to vote right so it's not like, um I wouldn't imagine that they're going to vote I mean do they pull the employees to get their Vote logistically or how does that actually work, no so if it's an interestingly if it's an asset sale or a merger. Under corporate law the the employees do get a pass through of the vote and the trustee will usually put together.

[42:59] A summary of the transaction and solicitation of votes it's essentially the preparing a proxy statement it's not called back it's not a public company but they're basically preparing the proxy statement. Prescribing the transaction saying hey do you have the right to vote Yes or No let us know, uh if it's a stocks uh sale so if the buyer is offering to buy stockof of the ESOP own company. There's no requirement to pass through the vote now the the company could amend its ESOP plan.

[43:32] To require a pass through a vote and all circumstancesand they could also say the pass through. 1 employee 1 Vote or they could say no number of shares in your ESOP account represents number of votes so it's. Uh you know they have some flexibility theresome people think about. Again a lot of especially early on they're like oh well this is this will be like our poison pill to kill any potential sale but then. You calm them down and say you know wait look there may be a time where it's appropriate but.

[44:04] Do you really want your employees making that decision what they get overwhelmed by it, would it be emotional versus a trustee who's going to be hiring an independent appraiser to evaluate this offer and kind of make a more calculated. Business decision like what is the best investment option.

[44:24] And what is in the best interest of the employees accordingly a lot of times they say yeah we should leave that decision of the trustee, yeah I I kind of tend to agree with that too because you know there's a lot of irrationality in that and it in and ultimately they could make a bad decision when you get down to it because it's like write their emotional about it and it's like look you know if we know like for instance your example earlier was like we know we've hit a mature button or not going to grow much more technology has changed so quickly we just we need to sell right but they want to say hey old days and we're like we you know you got to make a good business decision at the end of the day so I would agree that that that needs to be in the trustee um and I think that's a concern a lot of times with with esops is they shareholders are like hey my employees are going to vote something and I don't agree with that so I think it's it's something that they have to really get comfortable with, and part of part of what I wanted to kind of convey in this is that you do need to consult with people like Greg that can really help designed the documents and the legal language to make sure that those are in conformance with what your goals and objectives are as long as they're um.

[45:36] You know erisa proved as well so it's like that balance of Eros is always going to be there we can want something but it doesn't necessarily mean we're going to get it it just means it, uh in Conformity sowell cool well cool so great great topic today I know we're kind of pretty much most out of time but um you know thank you so much Greg um for coming back on the podcast today and I think for.

[45:59] Um you know if you're going to reach out to Greg for a question you're more than welcome to um how best should they get a hold of you if they if you have if they have any questions. Yeah you can uh email me at Gordy porter.com or you can also uh give me a call 61422720005 go to the porter Wright website and you can look up my bio and, contact information is there can also look look me up on LinkedIn message me on LinkedIn as well so yeah any of those methods there's many many ways to get a hold of Greg so so cool well thanks for the time today and for everybody else thanks for tuning in to journey to an ESOP and Beyond check out our website at journey to an ESOP calm and we will see you on our next step on this journey to an ESOP.