Methods for Handling ESOP Repurchase Obligation
There are several methods for addressing or creating ESOP sustainability issues. Corporate Partner David Solomon recently spoke on ESOP sustainability options at the NCEO Conference. Below is a discussion of various options, and to listen to the full presentation, click here.
Recycling Shares
The advantages of recycling shares include:
- Providing annual share allocation to current participants.
- Maintaining a constant number of shares within the ESOP.
Some considerations to keep in mind are:
- Benefit level is driven by the annual volume of shares distributed from the plan, potentially leading to an inconsistent year-over-year annual benefit to participants.
- Can lead to disproportionate account values among certain groups of ESOP participants over time.
- Tends to lead to higher future repurchase obligations.
Redeeming Shares
The advantages of redeeming shares include:
- No annual contribution required.
- Neutral impact on the price per share at time of redemption.
- Participants’ ownership percentage accretes as shares are redeemed.
Some considerations to keep in mind are:
- New or existing participants will not receive additional allocations.
- Concentration of account balances leads to “have” and “have-not” situation and may lead to increased repurchase obligations.
ESOP Re-leveraging
The advantages of re-leveraging shares include:
- Breaking the connection between repurchase obligation and benefit level.
- Allocating repurchased shares over a longer period of time, thereby providing significant control over the annual benefit level.
- Providing a pool of shares available for new and current participants.
- Maintaining a constant number of shares within the ESOP (assuming all redeemed shares are resold to the ESOP).
- Increasing corporate cash to fund additional growth opportunities since future ESOP repurchase obligation is reduced.
Some considerations to keep in mind are:
- Increases annual transaction and administrative complexity and cost.
- Reduces value allocation to current participant to provide value to future participants.
You can hear more about these options, along with firsthand experiences of an ESOP company, here. If you have questions, please don’t hesitate to reach out to David Solomon or a member of LP’s ESOP team.