NCEO Finds Acquisition a Leading Factor for ESOP Terminations

October 1, 2007 ( - While the National Center for Employee Ownership (NCEO) found no simple formula explains Employee Stock Ownership Plan (ESOP) terminations in general, the majority of companies it interviewed terminated their ESOPs in connection with being acquired.

Seventeen of the 30 companies interviewed by the NCEO terminated their ESOPs due to acquisition. In addition, articles written by two other companies were detailed enough to be included in the NCEO data.

Twelve of the acquired companies said features of the acquisition offer led them to accept and eight of those 12 said the most important feature of the offer was price. Most of the acquired companies were majority owned by their ESOPs with an average of 83% of shares owned by the plan.

Seven of the companies interviewed by the NCEO terminated their ESOPs while continuing operations. Half of those companies reported being in financial crisis prior to terminating their plans. Of the six companies that gave reasons for terminating their ESOPs, four said repurchase obligation was a significant factor.

Other reasons cited by companies for discontinuing their ESOPs, according to the NCEO report, included:

  • Leadership issues drove ESOP termination for three of nineteen acquired companies and two of seven termination companies. The leadership issue was either the retirement of a visionary leader who supported employee ownership or the need to provide a greater equity stake to incoming managers.
  • Diversification of employee retirement assets was a motivator for seven of the 26 acquired or termination companies.
  • Legal liability was the sole factor that lead one company to terminate its ESOP and four of the nineteen acquired companies said they felt a fiduciary duty to accept the acquisition offer.
  • The need for strategic alliance or increased investment in the company motivated five of twelve acquired companies that provided data.

S corporations accounted for approximately two-thirds of acquired and termination companies, suggesting the S corporation tax advantage does not necessarily deter companies from eliminating their ESOPs, the NCEO said.

For comparison, the report included six interviews with companies with ESOPs that lasted 20 years or more. The report includes details of the company interviews and can be found  here .