Buying and Selling ESOP Companies

Transcription

1 Buying and Selling ESOP Companies CALIFORNIA/WESTERN STATES CHAPTER CONFERENCE UNITED FOR PEAK PERFORMANCE FRIDAY, SEPTEMBER 25 Alan Weissman Independent Trustee Therese Kingsbury Miles Treaster & Associates (MTA) Matthew Goedert Nixon Peabody LLP Our Agenda 2 Buying Acquisition of Companies as an ESOP Company Selling Sale of an ESOP Company 1

2 Acquisition of Companies as an ESOP Company 3 Develop Acquisition Goals 4 Board determines acquisition goals and policy Company and ESOP culture Market Share and Growth Supplement Strengths Offset Weaknesses Acquisition Strategy Cost of the Process Acquisition Financing Integration of Operations and Culture 2

3 Acquisition Goals 5 The Acquisition Team Board of Directors Company Officers Legal Counsel Accountant Financial Advisor ESOP trustee oversight capacity Little involvement if corporate transaction Material imparment of ESOP Assets Acquirer Transaction Summary 6 Identify targets Preliminary negotiation Letter of intent Financial/legal due diligence Financing commitments Definitive purchase agreement Board approval Closing 3

4 Negotiation/Letter of Intent 7 Non-binding letter of intent Involve counsel and tax advisors early regarding key structure issues Proceed in good faith Get the target to stand still Letter of intent should cap purchase price with downward adjustments based on due diligence Confidentiality Agreement Break-up fee? Acquirer : Due Diligence 8 Scope and Depth Financial Disclosures Customer Issues Industry Issues Environmental Issues Employee Issues Health Care and Benefit Plans IP and IT issues Other Potential Liabilities 4

5 Acquirer: Due Diligence 9 Confirm target valuation resolve conflicts Analyze potential liabilities/pitfalls Confirm acquisition fit to company goals Acquirer : Purchase Agreement 10 Target representations, warranties and indemnifications Target is in compliance, except as indicated on schedules Goal is to preserve benefit of the bargain against undisclosed liabilities or undisclosed adverse events Need for recourse against deep pocket other party 5

6 Acquirer : Structure and Tax Considerations 11 Buyers generally prefer asset purchase and sellers prefer stock sale: 100% S ESOP may be indifferent from tax perspective Liability issues addressed in representation and warranties ESOP company acquirer may be able to deliver Section 1042 capital gains tax deferral to selling shareholders of Target Earnout structures Acquirer: Governance Issues 12 Corporate acquisitions generally require Board but not shareholder approval Shareholder approval required to issue additional shares if necessary as part of acquisition Pass-through required if merger involved If majority ESOP-owned, do we need a fairness opinion Fairness opinion by Company s financial advisor to board may be appropriate. 6

7 Sale of an ESOP Company 13 Why ESOP Companies Get Sold? 14 Changing risk profile Market conditions Liquidity needs Non-ESOP shareholders want an exit without selling additional shares to the ESOP Unable to re-pay debt from operating cash flows Repurchase obligation issues Receive an unsolicited offer Need for a new capital structure 7

8 Parties Involved in the Sale of an ESOP Company 15 Buyer Company ESOP Management /Board of Directors Board of Directors / Shareholders Trustee Advisor (Legal & Financial) Advisors (Legal, Financial, & Accounting) Advisor (Legal & Financial) Plan Participants Issues for an Acquirer of an ESOP-Owned Company 16 Acquirer needs to be educated Differences between what is customary in non-esop M&A transactions and ESOP M&A transactions More or less due diligence and why Valuation/Fiduciary/Administrative Issues What happens to the Money and ESOP? 8

9 Optimal ESOP Company Sale Process 17 Board of Directors Develops Policies and Procedures for Sale Process/Hires Advisors Senior Management receives Offer/Confirms Offer is Bona Fide ESOP Trustees and its advisors analyze the offer Board of Directors reviews offer/recommends approval or disapproval Buyer due diligence, negotiation and documentation of transaction Post-Closing issues BOD Policies and Procedures 18 Should there be a policy developed to memorialize the objectives for maintaining ESOP ownership Policies and Procedures to address how to handle unsolicited offers Too good to refuse Do we need independent advisors? 9

10 Analysis of Offers by Senior Management 19 Management should treat real or not bona-fide offers Duty to information board or ESOP trustee? Offers to buy the Company are bona-fide if: Proposed consideration Other proposed deal terms are fair and reasonable Financial ability to pay the proposed purchase price Fiduciary Standards of Board Members 20 Board is subject to Business Judgment Rule and should take into account: Value to shareholder Culture and independence Employees Alternative purchasers Continuity of business 10

11 Fiduciary Standards of the ESOP Trustee 21 Exclusive Benefit Rule requires ESOP trustee to optimize value for all plan participants Standards for trustees: Good faith Diligent investigation Adequate consideration rules IRS Ruling ERISA Section 3(18) and proposed reg. 29 CFR (b) Conflicts between the BOD and ESOP Trustee 22 Board of Directors: Duty of good faith and reasonable standard of care (protection under the business judgment rule) ESOP Trustees Duty of Locality Potential conflicts if board members also serve as ESOP trustees 11

12 Trustees Evaluating the Offer 23 Does the offer equate to or exceed fair market value? Would the ESOP receive it fair share? What is the process to evaluate the transaction? Is the buyer the best deal partner? Evaluating the Offer 24 Fairness Opinion Financial Point of View Valuation Methods ESOP-related expenses Tax Benefits Control premium Marketability 12

13 Offering Price is Greater than the Appraiser Value 25 Am I obligated to sell stock in the ESOP Long-term prospects vs. intrinsic value Should I consider S Corporation benefits? Fairness of the deal 26 ESOP treatment relative to other parties: Employee contracts Amount Length Incentive plans to keep executive in place post-transaction Payment to executive upon sale Other side deals 13

14 The Offer Process 27 Did the Company just react? Did the Board hire an investment banker? Was the contract with the investment banker structure to ensure the best deal possible for the Company? Motivation of decisions get the best deal or get the deal done What About the Buyer? 28 Does the Buyer have the financial strength? (earn outs, holdbacks) Is the Buyer s first rodeo? What synergies is the Buyer likely to get? Could it make a better offer at a different time? 14

15 Other Issues for the ESOP Trustee 29 Can the ESOP trustee agree to an earn out? Can escrowed fund/earn outs/holdbacks be considered a part of the purchase price for purpose of determining Adequate Consideration and Fairness? Can the trustee take into consideration any other non-financial factors in evaluating the proposed transaction? Administrative Issues in Connection with the Sale 30 Participant voting requirements Repayment of ESOP debt/remaining shares in suspense account Plan termination/disposition of plan assets/full vesting Other qualified plans and protected benefits Triggering change in control provisions of deferred compensation plans Distribution of plan assets 15

16 Pass-Through Voting Requirements 31 ESOP participants only entitled to vote shares allocated to their ESOP accounts for a merger/sale of assets Stock sale transactions/tender offers do not require a passthrough vote (unless required by plan document) Approval Process for an Asset sale or Merger 32 Provide Disclosure Statement containing: Summary of Purchase Agreement terms/related party transactions Plain language explanation of transaction Comply with statutory timing of pass through vote/appraisal rights Meeting with participants 16

17 Outstanding ESOP Loan 33 ESOP Loan will have an impact on the ESOP s return from the transaction Obligation to repay the debt Allocation of unallocated shares Company contributions / dividend payments to pay down the loan Can the ESOP shares be sold for shares of the buyer? Participant distributions and rollover issues Options for ESOP Post-Transaction 34 Merge ESOP into buyer s plan Terminate ESOP and distribute assets to participants 17

18 Procedural Consideration for Plan Termination 35 Board resolutions terminating the plan Termination date (will trigger 100% vesting) File IRS favorable determination letter Amendment? Allocation date and hours Compensation to be used for the final allocation Additional Administration Considerations 36 Search for missing participants ESOP accounting 18

19 Concluding Observations 37 Every ESOP Company should have a policy to address the potential sale of the Company Avoid conflicts of interest between corporate fiduciaries Hire experience advisors Questions? 38 19