Participants Use Plan Money for Buyout

November 9, 2001 ( - Employees of Appleton Papers purchased all the stock of the paper products manufacturer from its European parent, Arjo Wiggins Appleton, using their 401(a) and 401(k) plan money.

Management and non-management employees voted to transfer $107 million from their retirement plans via an Employee Stock Ownership Plan (ESOP) into Paperweight Development Co. Paperweight, an acquisition vehicle, then bought Appleton.

Additional financing for the $180 million transaction came in the form of over $700 million in bank debt, bonds and junior capital.

S Corporation Structure

Paperweight combined an S Corporation structure – which shelters 100% of the company’s earnings from US corporate income tax – with an ESOP equity investment to acquire 100% ownership of Appleton.

In terms of the Internal Revenue Code, an S Corporation passes its income to its shareholders without paying federal corporate income taxes or, and in many cases, state corporate income taxes.

The shareholders become liable for their pro-rata share of income taxes on the earnings of the S Corporation.

As is the case of Appleton, the ESOP, as a benefit plan trust for company employees’ equity ownership, is a tax-exempt entity under federal tax laws and in many states’ jurisdictions.

Therefore, the S Corporation does not need to make cash distributions to the ESOP, as its shareholder, because it is not liable for income taxes.

Houlihan Lokey Howard & Zukin, an international investment bank, acted as financial advisor to Paperweight.

– Camilla Klein