Participants Use Plan Money for Buyout
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
editors@plansponsor.com