Employee Ownership and Veteran-Owned Businesses

ESOP companies generally have a hard time qualifying for various minority and other special set-aside programs if the plan owns more than 49% of the shares. Rules almost always require that a majority of the stock be owned by qualifying individuals, no matter what the demographic composition of the ESOP is. The Veterans Administration (VA), however, has rules that are easier to meet.

The Veterans First Contracting Program created by the VA provides set-asides for veteran-owned businesses competing for contracts for the VA. Peter Ford of Pillero Mazza PLLC, writing on the JD Supra site on August 8, says that "for the VA Program, stock held in an ESOP Trust will be treated as 'excluded stock' provided that five or fewer persons (i.e., individuals, estates, or trusts) own 50 percent or more of the total combined voting power of the company. Thus, if two individuals collectively own 50 shares of a VOSB [veteran-owned small business] and an ESOP Trust holds 50 shares, the stock held by the ESOP Trust would be treated as excluded stock, and the veteran would be required to individually own 51 percent or more of the outstanding stock (excluding the ESOP stock) or, in other words, at least 25.5 of the 50 individually-owned shares."

"Conversely, if there are six individuals who collectively own 60 shares and the remaining 40 shares are held through the ESOP Trust, the ESOP stock would be treated as outstanding stock. Thus, under that scenario, the veteran would be required to individually own 51 percent or more of the outstanding stock (including the ESOP stock) or, in other words, at least 51 of the total 100 shares—which is always the case under the SBA Program."

ESOPs still could not own 100% of the company, but they could own a large majority of it.