Dean Mead’s Tax Department handles tax planning issues for businesses and individuals. The attorneys in our department have extensive experience in a full range of…
Employee stock ownership plans (ESOPs) can help companies decrease their cost of financing, maximize tax advantages, maintain effective management control, and structure compensation to enhance performance.
Equally important, ESOPs are an effective tool that enables company founders and owners nearing retirement to develop a succession plan that meets their estate planning and financial goals while keeping their businesses strong and viable for current valued employees. Whether this transition involves a partial ESOP sale or a complete transfer of ownership to an ESOP, it requires the kind of experienced business and regulatory guidance that Dean Mead offers to all parties at the ESOP table: owners, ESOP trustees, lenders, investors (such as private equity funds) and employees.
Dean Mead helps Florida-based businesses, as well as organizations nationwide, achieve their ESOP objectives by guiding them through the transition to employee ownership and helping to make it a long-term success. We are one of the few Florida law firms that work on structuring and closing ESOP transactions, having handled transactions that range in value from several million dollars to more than $100 million, depending on a client’s size, equity value and objectives. That includes an initial, partial sale (for example, 30 percent of the company stock being sold to the ESOP), up to complete ownership transfer from the founders to the ESOP.
Our firm has a full-service statewide ESOP practice, and can work with local counsel around the country while addressing the federal law issues for ESOP creation. We keep current on the latest ESOP developments through our active roles in organizations like the ESOP Association (www.esopassociation.org) and the National Center for Employee Ownership (www.neco.org). Shareholder Joseph “Jay” Van Heyde II, for example, frequently speaks to ESOP Association groups on ESOP-related topics that involve funding methods, partial and complete sales to ESOPs, ESOP distribution policies, business entity structuring for LLCs and partnerships to become ESOP companies, and trustee and lender concerns in ESOP transactions.
Advice to ESOP Trustees
On many ESOP transactions, we are retained as special counsel to the ESOP trustee. Trustees play a pivotal role in each ESOP transaction, representing employees and beneficiaries as a company’s founder and other owners sell all or a portion of their stock to the ESOP. Our lawyers fully understand the complexities and potential conflicts of interest in such a process, and help trustees:
- Comply fully with ERISA, Internal Revenue Code, ERISA, Internal Revenue Service (IRS) and Department of Labor (DOL) requirements, including the requirements that the trustees act prudently and in the best interests of plan participants and beneficiaries.
- Work with the independent valuation firm selected by the trustee to determine the fair market value of the stock being sold to the ESOP, and make certain that proper valuation procedures are followed and due diligence undertaken.
- Fulfill all fiduciary duties set by the Employee Retirement Income Security Act (ERISA).
- Ensure that all stock sale and purchase documentation is properly prepared.
A wide range of trustees depend on Dean Mead for assistance, including bank trust departments, trust companies and individual trustees. We help them in any of their capacities, whether they simply represent the ESOP to negotiate the sale and ownership transfer, or continue as ongoing trustee. An important part of our role is helping trustees respond to DOL challenges to stock price valuation or to financing arrangements for the stock purchase. In such instances, our thoroughness at transactional documentation can be crucial to a trustee’s successful response.
Advice to Companies and Their Owners
Dean Mead lawyers know that ESOPs are not right for every employer, but we thoroughly understand the compelling benefits for many business owners – particularly those who are nearing retirement from a small to medium-sized company. In such instances, we can advise on the use of an ESOP as a business succession or estate planning tool. That includes situations where the company founder and owner seeks a gradual retirement transition, one that begins with a partial ESOP sale and continues in stages to full ownership transfer. When retirement is not a pressing concern, we can offer tax planning that enables limited liability companies and similar entities to convert to corporate status and adopt an ESOP. We also can represent a single selling shareholder in companies with multiple shareholder owners.
In many ESOP transactions, the company has long standing outside, corporate counsel. We often work closely with them to help prepare all transactional paperwork and set up the ESOP plan and trust documents. While the company’s general, outside counsel may be experienced at stock transactions, they often are not familiar with the technicalities of the ESOP form – making our advice as ESOP special counsel particularly useful on such issues as:
- Determining the best tax and employee benefit structure for an ESOP transaction.
- Planning for Internal Revenue Code Section 1042 tax deferral transactions.
- Preparing and reviewing the bank financing documents.
- Submitting plan documents to the IRS.
- Assisting with ESOP-related compliance and governance concerns.
Advice to Lenders
Dean Mead’s ESOP team includes experienced lawyers from a wide range of our firm’s disciplines including employee benefits, tax, corporate, banking, real estate and estate planning, all working in concert to achieve our clients’ ESOP goals. An example of how our diverse capabilities provide clients with synergy is our ability to advise banks and other financing providers – such as private equity groups (PEGs), venture capital (VC) funds and other investment funds – on the details of lending to, or investing in, ESOP companies. This is an activity that the DOL and IRS scrutinize closely, and our combination of banking, tax and benefits skills ensure the optimal combination of regulatory compliance and business opportunity for both standard commercial and mezzanine lending.
Representative examples of ESOP transactions that Dean Mead has structured and closed illustrate the kind of sophisticated matters on which we advise:
- Transferring 30% of a general contractor’s issued and outstanding common stock from the selling shareholders to a newly created ESOP.
- Redeeming 100% of the issued and outstanding common stock of a specialty contractor and simultaneously selling 100% of its newly issued common stock to an ESOP on a seller-financed basis.
- Converting a limited liability company into a corporation, followed by a partial redemption and partial sale to a newly created ESOP of 100% of the issued and outstanding common stock through a combination of seller and bank financing.
- Redeeming 100% of the issued and outstanding common stock of a manufacturing company and simultaneously selling 100% of its newly issued common stock to an ESOP on a seller-financed basis.
- Selling 51% of a specialty contractor’s issued and outstanding common stock to an ESOP.
- Representing the ESOP of a publicly traded NASDAQ company, including the ESOP’s underwritten sale of a portion of its employer securities.
- Representing the ESOP trustee in the sale of the company stock owned by the ESOP to an unrelated third party.
- Representing the ESOP trustee in a second stage transaction in which the ESOP moves from owning a minority interest in the company to a majority or a 100% ownership position.
Such experience means that Dean Mead’s respected ESOP practice can help companies from many different business sectors implement ESOPs that are tailored to their specific needs and that meet all legal and regulatory requirements.
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