Mergers, Acquisitions, and Corporate Restructurings

By Patrick A. Gaughan | Go to book overview

9
EMPLOYEE STOCK OWNERSHIP PLANS

Employee stock ownership plans (ESOPs) are involved in mergers and leveraged buyouts (LBOs) in two main ways: as a financing vehicle for the acquisition of companies (called EBOs), including through LBOs, and as an antitakeover defense. Bidders and employees discovered that they could make a bid for a firm through an ESOP and realize significant tax benefits that would help lower the cost of the buyout. For their part, targets learned that ESOPs could provide them with some assistance in their antitakeover efforts.

In the United States, ESOPs are allowable under the Employee Retirement Income Security Act of 1974 (ERISA), a law that governs the administration and structure of corporate pension plans. The ERISA specifies how corporations can utilize ESOPs to provide employee benefits. An ESOP provides a vehicle whereby the employer corporation may make tax deductible contributions of cash or stock into a trust. These trust assets are then allocated in some predetermined manner to the employee participants in the trust. The corporation’s contributions to the ESOP are tax-deductible. Moreover, the employees are not taxed on the contributions they are entitled to receive until they withdraw them from the ESOP. The contributions are made in direct proportion to each plan participant’s compensation. The proportion is based on the ratio of the employee’s compensation divided by total compensation. Thus, all employees are paid the same percentage but different absolute amounts.

Participants in an ESOP are required to invest in the employer’s stock. They may buy stock in subsidiaries of the employer’s corporation if the employer corporation owns more than 50% of the subsidiary’s stock. Unlike pension plans, ESOPs do not try to lower the risk level of their assets by diversifying. Although pension plans seek to invest in a variety of assets to lower risk, ESOPs are designed to hold only cash, cash equivalents, or the stock of the employer corporation. The risks of having a very large percentage of one’s retirement wealth invested in one’s employer’s assets were underscored by the fallout from the Enron debacle.


HISTORICAL GROWTH OF ESOPs

Employee stock ownership plans were very popular in the United States during the 1920s, when the stock market was rising and Americans widely owned stock. The stock market crash of 1929 and the economic downturn that followed caused the stockholdings of employees to decline dramatically. After the decline in the value of the firm’s stock,

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Mergers, Acquisitions, and Corporate Restructurings
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Case Studies xi
  • Preface xv
  • 1 - Background 1
  • 1 - Introduction 3
  • 2 - History of Mergers 35
  • 3 - Legal Framework 74
  • 4 - Merger Strategy 125
  • 2 - Hostile Takeovers 181
  • 5 - Antitakeover Measures 183
  • 6 - Takeover Tactics 243
  • 3 - Going-Private Transactions and Leveraged Buyouts 291
  • 7 - Leveraged Buyouts 293
  • 8 - Topics in Going-Private Transactions 335
  • 9 - Employee Stock Ownership Plans 366
  • 4 - Corporate Restructuring 387
  • 10 - Corporate Restructuring 389
  • 11 - Restructuring in Bankruptcy 435
  • 12 - Corporate Governance 473
  • 13 - Joint Ventures and Strategic Alliances 523
  • 14 - Valuation 538
  • 15 - Tax Issues 607
  • Glossary 623
  • Index 631
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