I attended The ESOP Association’s tri-chapter conference in Pinehurst earlier this week. Thank goodness I decided not to sign up for the Monday morning golf outing – it was about 34 degress and raining.
ESOPs are still alive and well, yet there is still a gaping hole in the capital markets. There is no equity-oriented capital available to back ESOP transactions. So ESOPs continue to work well for private company owner who want to retain operational responsibility for their businesses, including most importantly generating enough cash flow to repay their ESOP related debts. For others who love the idea of selling the company to their employees, but otherwise really want to relinquish operational control, the capital markets have no solution.
One distressing comment came from an ESOP trustee, in discussing what to do if an ESOP-owned company receives a buyout offer. He said the trustee’s role is to act solely in the best interest of the ESOP participants, but then also said the trustee can only consider financial criteria in evaluating a bona fide buyout offer. (Note: I’m not completely sure who sets the rules under which the trustees are bound.) In other words, if the buyer’s past acquisition practices suggest it is likely that most of the employees will lose their jobs after their company is sold, the trustee cannot consider this in deciding if the offer is a good one.
It gets worse… sometimes such a transaction goes through pass-through voting. The ESOP participants are provided proxy stle information and vote on whether to approve of the sale of their company. This trustee then told us that if he thinks the employees voted incorrectly, then he as a fiduciary is bound to override their vote.
(Sometimes my wife lets me make certain decisions around the house, and she overrides me if I make the wrong desicion; but I knew this was part of the deal before getting married. But I digress.)
Please share your comments… DB