Tag Archives: Employee Stock Ownership Plan

Main Street Employee Ownership Act Signed

Contributed by William Scogland, October 3, 2018


Employee Stock Ownership Concept with laptop and phone in background

On August 13, 2018, as part of the John S. McCain Fiscal Year 2019 National Defense Authorization Act, President Trump signed into law the Main Street Employee Ownership Act, which was originally introduced by Senator Gillibrand and Representative Velazquez, a rare bipartisan achievement.

Employee Stock Ownership Plans (ESOPs) are often established using a loan to finance the purchase of company stock by the plan. ESOPs only infrequently default, so this is an area in which the government can be confident that the taxpayers will get their money back. The Small Business Administration (SBA) was authorized to make ESOP loans in 1979, but it was done only infrequently because it was so cumbersome.

The Act facilitates the establishment of ESOPs by revising the rules under which the SBA may assist small employers to transition to employee ownership.

Specifically, it:

  • Permits the SBA to make loans to companies that can then re-lend to ESOPs (prior law only allowed direct loans made to ESOPs, but commercial ESOP loans are almost always made to the company and relent to the ESOP);
  • Permits ESOP loans to be made under the SBA’s preferred lender program, which should expedite the process;
  • Provides that ESOPs do not need to have full voting rights to qualify, which aligns more closely with Federal income tax rules;
  • Makes an exception to an SBA rule that sellers of a company cannot have an ongoing role in the firm (the Act codifies in statute a recently released SBA policy that allows the seller to stay on as an owner, officer, director, or key employee of the company, when the ESOP acquires a controlling interest i.e., 51 percent or more, but any seller who remains as an owner, regardless of percentage of ownership interest, would be required to provide a personal guarantee, which is often required in commercial ESOP loans in any event);
  • Helps finance transition costs, which can be expensive, by allowing transaction costs to be financed as part of the SBA loan; and
  • Grants SBA the authority to waive equity requirements (SBA currently requires an equity injection of at least 10 percent of the total project cost for loans that finance change of ownership, but under the Act SBA may waive that requirement on a case by case basis for loans that finance a change of ownership to an ESOP).

Small businesses, which may be considering a switch to employee ownership, should be aware of these changes that may make the transition easier. In some limited circumstances, one or more of these changes may even be the deciding factor in proceeding with a transaction.


Overpaying for Company Stock Lands ESOP Fiduciaries in Hot Water

Contributed by Kelly Haab-Tallitsch

The U.S. Department of Labor (DOL) recently announced a $1.1M judgment in favor of employees in the Gruber Systems Inc. Employee Stock Ownership Plan (ESOP). The department filed suit against Gruber Systems Inc., a California corporation, and its CEO in May of 2015 alleging they caused Gruber ESOP participants to lose money when the ESOP bought company stock at considerably more than fair market value. The DOL alleged that money used to fund stock purchases to shore up the company during financial troubles should have been used to fund the retirement accounts of Gruber employees. The consent judgment requires Gruber and its CEO to return $1.1 million to the Gruber ESOP and pay $220,000 in civil penalties, and permanently bars them from serving as a fiduciary or service provider to any ERISA-covered employee benefit plan.

CashThe announcement of the Gruber consent judgment came on the heels of another DOL suit filed January 20, 2016, against Florida-based Commodity Control Corp. to recover losses to its ESOP due to alleged overvaluation of the company stock. In 2009, the owners of Commodity Control sold their entire ownership interest to the Commodity Control Employee Stock Ownership Plan resulting in the ESOP owning 100% of the company. In its complaint, the DOL alleges the ESOP overpaid for the company stock due to a failure on the part of the defendants, including the former owners, the company and the ESOP, to obtain an accurate and current appraisal of the company stock. The DOL is asking the court to require the defendants to restore the losses to the ESOP and to require the former owners to disgorge any payments or proceeds they received from the sale of their stock to the ESOP.

These targeted suits by the DOL illustrate the department’s continued focus on ESOPs, and valuations of private companies in particular.

So how can you stay out of the headlines as an owner or manager of an ESOP company or other ESOP fiduciary?

Ensure an accurate valuation of your company with the following guidelines:

  1. Choose your valuation advisor carefully. Use a reputable source that won’t be influenced by conflicts of interest.
  2. Provide complete, accurate, and up-to-date information and data to the valuation advisor.
  3. Check and double-check the valuation report you receive and assess it for consistency and accuracy. Review assumptions about growth projections, financial statements, business risks and other factors that might influence stock value, and make sure it’s reasonable.