North Carolina Law Is First in U.S. Qualifying ESOPs for Historically Disadvantaged Contracting Preferences

The North Carolina legislature has passed and the governor has signed S. 802 (PDF), an infrastructure finance bill that also includes an unrelated provision allowing ESOPs in which at least 51% of the participants are “minority persons or socially and economically disadvantaged individuals” to qualify for the state’s historically underutilized business set-aside program. The law states that “an ESOP company applying for certification as a historically underutilized business shall provide an attestation that it meets the requirements of this subdivision together with such documentation supporting the attestation as may be required by the Secretary." The law became effective on July 1, 2024.

Previously, ESOPs had not qualified for any state or federal set-aside programs for contracting with historically disadvantaged business owners. Because the ESOP’s formal owner is the ESOP trust, and the trustee is not a member of a historically disadvantaged group, these set-aside programs have not been available to ESOP companies even if the large majority of their ownership is held by these disadvantaged individuals. The North Carolina law is a groundbreaking effort to make ESOPs qualified for these programs. Hopefully, this will serve as a model for other states and the federal government.

The original version of the bill required that the ESOP company be at least 51% owned by the ESOP. That language was dropped, leaving ambiguity about whether a minority ESOP, even one with a very small percentage of ESOP ownership, would still qualify if a majority of their participants are in the covered groups.