ESOP Practice

DELASHMIT LAW FIRM LLC
ESOP (EMPLOYEE STOCK OWNERSHIP PLAN) PRACTICE PROFILE & REPRESENTATIVE TRANSACTIONS

Thank you for the opportunity to introduce the DELASHMIT LAW FIRM LLC ESOP Practice.  In a nutshell, we help private business owners sell some or all their business, pay no capital gains taxes on the sale proceeds, and use tax-deductible financing to do it (Section 1042 Structure).

Also, please keep in mind that, when faced with a “credit crunch” and a slowing M&A market, we’re not required to have bank financing available to close a leveraged-ESOP transaction.  We’ve structured several seller-financed transactions designed to take advantage of the ESOP tax efficiencies and improved cash flow to optimize the benefit to the seller(s).  Because ESOP Attorneys “create” the purchaser (when we establish the ESOP Trust), we have no need to undergo the long and exhausting process of searching for a compatible buyer for the company.

If you have clients or colleagues who may be looking for some liquidity (considering retirement or afraid of this volatile market and the idea of having all of their “eggs in one basket” so to speak), we would appreciate the opportunity to discuss with the client their objectives and explore whether an ESOP transaction might be appropriate to accomplish those objectives.

We’ve provided below a bit more information about the process and benefits of a leveraged-ESOP transaction for those clients or colleagues who may be interested.

ESOP Appeal:

We’ve found that most family/private business owners are interested in exploring an ESOP transaction when we demonstrate that a leveraged-ESOP transaction could allow them to:

• sell some or all of the stock of their family business (while remaining a private company),
• pay no capital gains taxes on the proceeds of sale (as much as a 21% savings in Georgia and even more in some states),
• finance the transaction with tax-deductible dollars (both the principal and interest can be tax-deductible),
• reinvest the proceeds of the transaction for the benefit of their family in a portfolio of diversified investments,
• maintain operational control of the business after the transaction (through customary corporate governance techniques),
• foster an ownership culture among their employees, and
• create ultimately a “for profit, tax-exempt entity” (by creating an S-corp company, wholly-owned by an ESOP).

Mr. Delashmit has closed as many as 13 private ESOP transactions in a year totaling nearly $780,000,000 (including leveraged-ESOP transactions, reorganizations/refinancings, and sale transactions). A variety of industry groups are represented among our transactions, which include: manufacturers of consumer apparel and consumer electronics; construction companies; hospital and health care systems; a consumer finance company; a travel and entertainment conglomerate; an architecture and engineering firm; consolidation of real estate management companies; home builders; a manufacturer and distributor of texturized yarn; insurance companies; a business forms and products company; and a lawn products manufacturer.

Because a significant part of the available tax deductions is a function of the size of the eligible payroll, the tax efficiencies tend to be more apparent for companies with a larger number of employees (more than 25) and a significant payroll base, but we’ve structured transactions with fewer employees utilizing different techniques (i.e. tax-deductible dividends paid to the ESOP).  Furthermore, we’ve closed as many as 4 leveraged-ESOP deals in a 2 week span, totaling approximately $300,000,000 (representing potential tax savings to the selling shareholders of as much as $63,000,000 – to be reinvested for the benefit of their families).

A few of the more notable recent highlights include:

Transaction Summary, New York-Based Fashion ICON (Section 1042 Transaction – Undisclosed Amount):

Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in an ESOP purchase transaction that was prominently reported in Women’s Wear Daily and other fashion magazines. The transaction was structured/designed to permit the selling shareholders to eliminate capital gains taxes on their sale proceeds by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Advised the Trustee in connection with the contribution, reorganization and recapitalization of a licensed apparel manufacturer (specializing in the design, manufacture and sale of branded casual sportswear, formalwear, bridal wear and resort wear in owned retail stores and through department and specialty stores), and subsequent leveraged-ESOP transaction for the transfer of minority percentage of Class B Convertible Preferred Stock of the company.

Transaction Summary, Sale of ESOP Company (Sale Subsequent to 2005 ESOP Transaction):

Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in the role of successor trustee in the negotiation of third-party sale in 2007 of an apparel manufacturer (licensed brands) to US operating subsidiary of a public company traded on Hong Kong Exchange for $129,000,000, subsequent to a leveraged-ESOP transaction in 2005 for the transfer of Class B ESOP Convertible Preferred Stock of company. Net proceeds to the ESOP exceeded $4,600,000 after repayment of all acquisition debt and excise taxes.

Transaction Summary, Apparel (Section 1042 Transaction, followed by S Corporation Election):

Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in a $37,000,000 ESOP purchase transaction designed to permit the selling shareholders (3 brothers) to eliminate capital gains taxes on their sale proceeds (a tax savings of more than $7Million), while at the same time creating a “for profit, tax-exempt entity” through the organization of an S-corporation holding company that is wholly-owned by an ESOP (a qualified plan known as an Employee Stock Ownership Plan). Our ESOP/Corporate Finance attorneys advised the Trustee in connection with the contribution, reorganization and recapitalization of a New York-based licensed apparel manufacturer (of handbags, computer bags, and carrying cases for electronic devices), and subsequent leveraged-ESOP transaction for the transfer of 100% of the Common Stock of a holding company for $37,000,000, including creation of the Trust and Plan, primary financing transactions ($55,000,000 Credit Facility to Affiliates; Inter-Company Credit Facility of $52,000,000 term/revolver; and $37,000,000 internal ESOP loan), exclusive license agreements, general and administrative services agreements, inventory management and sales agreements, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, creation of management incentive plan, and subsequent S-corporation election for the ESOP-owned company.

Transaction Summary, Transportation (Section 1042 Transaction – Seller Financed):

Represented the Trustee (a Corporate Fiduciary headquartered in the Midwest) in an $85,000,000 ESOP purchase transaction designed to permit the selling shareholder (a family limited partnership) to eliminate capital gains taxes on their sale proceeds (a tax savings of more than $17Million) by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Our ESOP/Corporate Finance attorneys advised the Trustee in connection with the contribution, reorganization and recapitalization of a full-service transportation, tours and activities provider, and subsequent leveraged-ESOP transaction for the transfer of 43.5% of the Class B Convertible Preferred Stock of a Delaware holding company for $85,000,000, including creation of the Trust and Plan, primary financing transactions ($39,000,000 one-day loan; $46,000,000 of Inter-Company dividends; and $85,000,000 internal ESOP loan), subsequent sale of $39,000,000 of Seller Subordinated Notes, amendment to existing credit facility, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of management incentive plan.

Transaction Summary, Telecommunications-Technology (S Corporation Transaction – Sellers Participate in ESOP Post-closing):

Represented the company, a privately-held aggregator of international and domestic long-distance services [deploying Voice-Over-IP (VOIP) technology], in a $25,000,000 ESOP purchase transaction designed to permit installment sale tax treatment for shareholders, and to create a “for profit, tax-exempt entity” through the reorganization of a limited partnership to an S-corporation wholly-owned by an ESOP (a qualified plan known as an Employee Stock Ownership Plan). Advised the company and management in connection with the conversion and reorganization of the company, and simultaneous redemption of all outstanding stock and leveraged-ESOP transaction for the transfer of 100% of the Common Stock of the company for $25,000,000, including creation of the Trust and Plan, preparation of Redemption Agreement and Subscription Agreement, primary financing transactions ($4,000,000 Revolving Credit Facility and facility for foreign receivables guaranteed by the Export Import Bank of the United States subject to Master Guarantee Agreement; $23,500,000 in Seller Subordinated Notes; and $25,000,000 internal ESOP loan), distribution of AAA balances and subordinated loan-back, debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of corporate governance charters addressing management.

Transaction Summary (ESOP Stock Redemption):

Represented the Trustee (Corporate Fiduciary) in a corporate redemption transaction featuring the transfer of $230,908,000 of ESOP-owned stock of an industrial fan company, satisfaction of ESOP loans, and subsequent merger of Plan into existing Section 401(k) and Savings Plan.

Transaction Summary, Children’s Apparel (Section 1042 Transaction):

Represented the company (a designer and manufacturer of branded, licensed and private label children’s apparel for toddlers to teens) in a $17,100,000 ESOP purchase transaction designed to permit the selling shareholders (three brothers) to eliminate capital gains taxes on their sale proceeds by making a qualifying election under Section 1042 of the Internal Revenue Code of 1986, as amended. Advised the company and shareholders in connection with the contribution, reorganization and recapitalization of a holding company enterprise, and subsequent leveraged-ESOP transaction for the transfer of 30.0% of the Class B Convertible Preferred Stock of a New York holding company for $17,100,000, including creation of the Trust and Plan, primary financing transactions ($14,000,000 revolving credit facility; $5,000,000 term loan facility; and $7,900,000 one-day bridge loan), subsequent sale of $7,900,000 of Seller Subordinated Notes, negotiated new credit facility, holding company inter-company loans, distribution of S-corporation AAA balances ($9,200,000), debt subordination and intercreditor relationships, security interests and pledges of assets and stock, and creation of management incentive plan.

Transaction Summary, Construction Company (S Corporation Transaction):

Represented the Trustee (Professional Fiduciary) in a leveraged-ESOP transaction for the purchase of all of the issued and outstanding Common Stock of a non-union contractor (specializing in storm drain, water, sewer, and underground fire protection construction servicing residential, commercial, and public works sectors), including amendments to the existing Trust and Plan, purchase of capital stock for $35,000,000 (representing approximately 69.6% of the fully-diluted equity post-transaction, after giving effect to the detachable warrants and management incentive plan), primary financing transactions (including cash contributions of $2,400,000; $10,000,000 senior term loan; and $29,000,000 demand loan), subsequent S-corporation election, offering and issuance of $29,000,000 Junior Subordinated Notes with detachable warrants (to purchase approximately 27.5% of the fully-diluted equity post-transaction), approval of a management incentive plan (permitting awards of stock appreciation rights representing up to 15% of the fully-diluted equity post-transaction), and subordinated security interests and pledges of assets/stock.

Approach to ESOP Transactions

The Firm counsels clients on corporate law, ESOP design, executive compensation, finance, securities law, and tax aspects of ESOP transactions.

The Firm and its team of attorneys work with accountants, business appraisers, financial advisors, commercial bankers, investment bankers, institutional trustees, private equity funds and other sources of capital, and third party administrative firms in order to design, document, and execute transactions for the Firm’s clients efficiently.

Government Audits of ESOPs and ESOP Transactions

The Firm’s ESOP attorneys are experienced in representing companies and ESOP trustees in U.S. Department of Labor and Internal Revenue Service audits of ESOPs and ESOP transactions. The Firm an in-depth knowledge of the legal issues surrounding valuation of closely-held companies – issues that often are a focus of these audits. We are also experienced in the use of the remedial programs of the Department of Labor and the Internal Revenue Service to correct mistakes and oversights in the administration of ESOPs.

Contact

For more information regarding the Firm’s ESOP Practice, please contact us here.