Spring 2009
FOCUS ON EMPLOYEE STOCK OWNERSHIP PLANS
Editor for This Issue: Malcolm ("Mike") R. Hartman
ESOP Transaction Insights
Thought Leadership Article:
Indiana's ESOP
Initiative
Alexander L. Mounts, Esq., and Lisa A. Durham, Esq.
We recently had the privilege and honor of working with Willamette
Management Associates and other professionals on the first employee stock ownership plan
(ESOP) transaction to close under the new Indiana ESOP Initiative (IEI) program. Richard
Mourdock, Indiana State Treasurer, created the IEI (1) to promote and encourage the
formation of ESOPs in Indiana companies and (2) to incentivize and reward Hoosier workers
to increase employee productivity. Mourdock is often quoted as saying, "One of the best
reasons to help Indiana companies become employee-owned is that no group of employee-
owners have ever, ever, ever, ever moved their company to Mexico or China!" This
discussion will first describe Treasurer Mourdock's background, as well as the background
of the IEI. This discussion will then focus on the IEI participation requirements. This
discussion will present a brief question and answer dialogue with Treasurer Mourdock
regarding ESOP formations. And, finally, this discussion will describe the application of
the IEI to Radian Research, Inc. Radian Research, Inc., was the first employer
corporation to implement an ESOP under this IEI program.
The ESOP Feasibility Analysis for a Potential ESOP Formation
Malcolm ("Mike") R. Hartman
Employee stock ownership transactions always require significant
preliminary analysis to determine whether or not a transaction will meet the needs of the
selling shareholder(s) and whether it will work for the company and its management team.
Sometimes much of this work is performed by a financial adviser who represents the
selling shareholders. Sometimes the work is accomplished by the financial advisory firm
that will be providing the valuation and fairness opinions to an ESOP trustee. This
article discusses who needs to be involved in the feasibility study, a recommended
process for accomplishing this important preliminary work, and the contents of a
feasibility study.
ESOP Employer Stock
Purchase Fairness Opinions
Malcolm ("Mike") R. Hartman
ESOPs continue to be an attractive vehicle to allow closely held
business owners to sell the company stock to the company employees. Today, almost all
ESOP trustees require that their financial adviser prepare a fairness opinion related to
the ESOP employer stock purchase transaction. This fairness opinion should state that the
employer stock purchase transaction is fair to the ESOP from a financial point of view.
This discussion presents a procedure checklist that may be considered by the financial
adviser (1) in conducting the employer corporation stock valuation or (2) in performing
any ESOP-related financial advisory due diligence analysis-such as the fairness
opinion.
Repurchase
Obligation Impact on the Sponsor Company Share Value
Kelly ("Bucky") R. Wright
The valuation procedures related to the sponsor company stock held by
an employee stock ownership plan (ESOP) have evolved in recent years. The biggest single
change is the emphasis being placed on the future share repurchase obligation of the
sponsor company. This discussion describes (1) the need for the valuation analyst's
consideration of this sponsor company obligation and (2) the impact on the employer
corporation stock valuation of the alternative ways that the shares of the departing ESOP
participants are handled.
ESOP Valuation and
Financial Advisory Services Bibliography
Charlene M. Blalock
This bibliography lists ESOP-related professional journal articles,
books and textbooks, previous Insights articles, and useful web sites. These reference
materials should be of interest to valuation analysts and to independent financial
advisers who practice in the ESOP area. And, these reference materials should also be of
interest to ESOP trustees, to ESOP lenders, and to other ESOP professional advisers (such
as lawyers and accountants).
The Market Approach-
ESOP Employer Stock Valuations During Economic Turmoil
Charles A. Wilhoite and Bobbie J. Jenkins
The market approach is a generally accepted business valuation and
security analysis approach. In many cases, it is particularly relevant to the fair market
value valuation of (1) an ESOP sponsor company and (2) the employer corporation shares
owned by the plan participants. There are generally accepted practices and procedures
with respect to the application of the market approach, particularly within the context
of an ESOP employer stock valuation. However, it is challenging for even the experienced
valuation analyst to perform a market approach valuation analysis during periods of
severe economic turmoil. This discussion identifies some of the factors that the
valuation analyst should consider in the application of the market approach in an
employer stock valuation during such periods.
Best Practices Article:
Employee Tax Basis
Considerations Related to Employer Corporation Stock Distributions
Robert F. Reilly and Robert P. Schweihs
When an ESOP employee/participant receives a stock distribution of
employer corporation stock, the employee has to keep track of (1) the stock's fair market
value per share, (2) the stock's tax basis per share, and (3) the total amount of net
unrealized appreciation related to the stock. The ESOP sponsor company, with or without
the assistance of a third-party administrator, should provide the employee/participant
with the necessary information to make these calculations. This discussion summarizes
some of the practical procedures related to tracking the employee tax basis tax
information with respect to employer corporation stock distributions. These procedures
affect both the ESOP sponsor company and the ESOP employee/participant.
Should Your ESOP
Company Elect S Corporation Status?
Kevin Long
The larger the percentage of the sponsor company stock that is owned
by the ESOP, the more compelling it is for the employer corporation to consider S
corporation status. However, there are a number of issues that are outside of the
employee benefits arena which may affect this taxpayer status consideration. This
discussion summarizes those concerns. They fall into two categories (1) S corporation tax
rules and (2) corporate/structural issues.
Uncertainty Describes 2008 Election Results Impact on ESOPs
J. Michael Keeling
This discussion is an edited version of The ESOP Association
President J. Michael Keeling's speech to the attendees of the 2008 Las Vegas Conference
and Tradeshow held November 13 and 14, 2008. This discussion focused on the legislative
outlook for ESOP companies in hard times.
Selling an ESOP-
Owned Employer Corporation
Michael McGinley
When a sponsor company establishes an employee stock ownership plan
(ESOP), the initial plan is usually (1) that the ESOP will stay in place forever and (2)
that all of the employees will enjoy the fruits of their labors. This benefit occurs when
the sponsor company shares in the employee accounts are put back to the sponsor company
at the time of the employee retirement. Sometimes, however, ESOP employer corporations
are sold. The existence of an ESOP does add a measure of complication to a sale of the
sponsor company. However, with the right advisers, a successful sponsor company sale
transaction can be completed for the benefit of all parties. This discussion presents an
overview of the process, issues, special considerations, roles, and responsibilities of
each party, and distribution rollover options in selling an ESOP-owned employer
corporation.
Market Factors for ESOPs in the Coming Years
Corey Rosen
ESOPs today face a future full of both promise and question marks. It
would be safe to assume that these conditions will continue to exist in the next few
years. This state of flux makes predicting the future of ESOPs very challenging. But
there are trends in the economy and the marketplace that offer indications of where ESOPs
may be heading in the coming years. This discussion presents thoughts on how certain
market and certain business characteristics may give us some insights as to what is on
the horizon for ESOPs.
Expert Advice Article:
Employee Stock Option Value in a Falling Market
Achaessa James
Stock option plans have long been an important tool for company
managers and boards to attract and retain the very best management team possible.
Incentive stock options (ISOs) are the most common form of such plans. In the current
period of economic uncertainty, however, such plans may provide little incentive because
the exercise price is often far higher than current market prices. This discussion
summarizes the implications of the repricing of the stock options and the consequences of
doing so.
How Patent Vulnerability Impacts Valuation
David Wanetick
This discussion presents practical advice with regard to the factors
that affect the value of patents and related technology intangible assets. In particular,
this discussion summarizes many of the valuation-related risk factors related to (1)
patent validity and (2) patent licenses and license royalty rates. And, this discussion
explains how such risk factors may affect the intellectual property valuation.
Regulatory Issues Related to Tax-Exempt Health Care Organization Valuations
Robert F. Reilly
Valuation analysts are often called on to perform fair market value
appraisals related to health care organizations. This is particularly the case when a tax-
exempt entity is entering into a transaction with a for-profit entity. And, such
transactions could include either (1) a purchase of property or (2) a purchase of
services. In either case, the tax-exempt entity is concerned that it (1) does not pay
more than fair market value for the property or services it purchases or (2) does not
receive less than fair market value for the property or services that it sells. This is
because tax-exempt entities-and particularly tax-exempt health care organizations-are
subject to various federal and state regulations regarding such issues. Accordingly,
valuation analysts that serve tax-exempt health care organizations should be at least
generally familiar with these regulatory issues. This discussion summarizes the
regulatory compliance issues related to tax-exempt health care organization
valuations.