Responding to Acquisition Offers in ESOP Companies
Describes both best practices in responding to unsolicited offers to buy an ESOP company as well as what happens when you do want to sell.
By Neil Brozen, Tabitha M. Croscut, Nancy Dittmer, Alex Perry, Edward C. Renenger, Corey Rosen, Mark B. Russell, Randolph R. Smith, Jr., and James G. Steiker
Format
Description
Whether or not an ESOP company is for sale, it needs to understand what should happen when offers are made or solicited. What board and fiduciary practices should be in place now so that ESOP companies can best control how they respond to offers? What are the legal requirements for boards and plan fiduciaries in vetting and negotiating offers? Where can an investment banker fit in? When a sale does occur, what administrative steps need to be taken? How should companies communicate with employees about their policies upon being acquired, as well as when an acquisition is in the works? And what if you don't want the company to be sold? This book addresses all these issues and more. The third edition has been updated throughout and adds a new chapter on when your company doesn't want to be sold.
Also see our book on the other side of this issue: Acquisition Strategies for ESOP Companies.
Table of Contents
Introduction
1. Fiduciary Issues and Practical Solutions for ESOP Company Boards When Responding to Acquisition Offers
2. Responding to Unsolicited Offers to Purchase ESOP Companies: Issues for Plan Fiduciaries
3. Evaluating Offers to ESOP Companies: The Case for Engaging an Investment Banker
4. Operational Issues Stemming from the Sale of an ESOP Company
5. Sale of an ESOP Sponsor Company: Questions of Time, Money, People, and the Law
6. Legal Considerations for Buyers and Sellers of ESOP Companies
7. Employee Relations Issues in ESOP Company Sales
8. What Can You Do If You Don't Want to Be Sold?
Appendix A: Sample Company Acquisition Policy
Appendix B: Sample Questions to Ask Potential Acquirers
Appendix C: Key ESOP Issues: Informational Letter to a Potential Acquirer
About the Authors
Excerpts
From chapter 1, "Fiduciary Issues and Practical Solutions for ESOP Company Boards When Responding to Acquisition Offers" (footnotes omitted)
Under Internal Revenue Code Section 409(e)(3), participants must be given the opportunity to direct the trustee of the ESOP to vote nonregistered shares allocated to their accounts on all corporate matters involving "the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transactions" as the secretary of the treasury may list in regulations. In addition to this legal proscription, some ESOP plan documents direct the ESOP trustee to vote unallocated shares in the same proportion in which ESOP participants direct the vote of allocated shares in their accounts.
Pass-through voting will require that the company and the buyer disclose a substantial amount of information regarding the sale transaction to ESOP participants to provide them with adequate information on which to direct the ESOP trustee's vote. This might be a problem for some buyers, while for others it might solely inform the structure of the transaction to use a stock purchase instead of an asset purchase or merger structure.
A few important caveats to participant-directed voting must be made at the outset. First, an ESOP trustee may be required to disregard the directions participants make regarding their allocated shares. The Department of Labor has written that the ESOP trustee should follow the participants' direction unless it can articulate well-founded reasons why the participant vote should be disregarded. Further, in Herman v. NationsBank Trust Co., the court determined that the trustee could not blindly follow the participants' directions regarding the unallocated shares. Instead, the ESOP trustee had to make an independent fiduciary decision. Therefore, the board cannot rely on the participants of the ESOP to vote against a transaction, as the ESOP trustee might be required to override the participants' directive if, for example, the participants are only voting to retain their jobs versus voting to maximize their ESOP account value.
Boards should keep the pass-through voting requirement in mind when considering how to respond to unsolicited offers and drafting unsolicited offer policies to apply, which will be discussed next.
From chapter 5, "Sale of an ESOP Sponsor Company: Questions of Time, Money, People, and the Law"
While a letter of intent is not required, parties typically enter into them. Note, however, that ESOP trustees typically do not want to sign a letter of intent, particularly if the sale is structured as an asset sale. This is because in an asset sale, the sponsor company - not the ESOP trustee - is actually the seller. If it is a stock sale, the ESOP trustee most often signs the letter of intent because legally the ESOP trustee owns the shares. Even if the purchase is an asset deal, the ESOP trustee will need to approve the letter of intent.
After the board appoints the independent ESOP trustee, the trustee hires a valuation advisor and an attorney. The sponsor company's attorney will want to review and comment on the engagement letters of the ESOP trustee's valuation advisor and the ESOP trustee's attorney.
It is an unusual aspect of the ESOP structure that, while the ESOP trustee and its team must remain independent of the company and the seller note holder, the sponsor company often pays the fees of the ESOP trustee and its professional advisors. Therefore, the sponsor company will be a signatory to those engagement letters for purposes of paying the fees. Even if the company and the seller note holder want the ESOP to pay the fees of the professionals who advise the ESOP, the law limits the kinds of fees that the ESOP can pay. The ESOP can pay fees for certain typical deal-related actions, such as the negotiation, documentation, and coordination of the purchase of the ESOP's shares.
The ESOP cannot, however, pay the fees for what are referred to as "settlor" functions. These functions can include the correction of any operational failures from the ESOP's annual employer administration The sponsor company, not the ESOP, must pay those fees. ESOP counsel typically helps the ESOP trustee navigate fee and conflict issues.
From chapter 7, "Employee Relations Issues in ESOP Company Sale"
Long before a company even considers being sold, it should communicate to employees what its policy is on being acquired. There is no requirement to do this. But it can greatly enhance the credibility of the ownership plan. This kind of discussion tells employees they can be treated as adults and that any sale will be carefully vetted to protect their interests,
What and how to communicate will depend on the company's policy, but assume that the policy is the typical one for a company that takes its ESOP seriously. Ideally, the company has the kind of written policy statement described in the first chapter of this book or at least has a clear, if informal, understanding at the board level that the company is not being managed for sale, and that the intention is to stay an independent, employee-owned company. However, given the right circumstances or a compelling offer, a sale would be seriously considered.
In this case, it would make sense to discuss with employees several key issues: