Strategy in a Down Market Evaluating Advantages and Risks, Best - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Structuring M&A and Private Equity Sales Involving ESOPs: Alternative Strategy in a Down Market Evaluating Advantages and Risks, Best Practices for Structuring the Deal TUESDAY, NOVEMBER 1, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Anthony J. Jacob, Partner, Hinshaw & Culbertson , Chicago David R. Johanson, Partner, Hawkins Parnell Thackston & Young , Napa, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Structuring M&A and Private Equity Sales Involving ESOPs: Alternative Strategy in a Down Market Strafford Live Webinar | November 1, 2016 | 1:00 p.m. – 2:30 p.m. EDT

David R. Johanson Senior Partner | HAWKINS PARNELL THACKSTON & YOUNG LLP Email: djohanson@hptylaw.com Direct: 707.299.2470 Cell: 707.225.2986 Anthony J. Jacob Partner | HINSHAW & CULBERTSON LLP Email: ajacob@hinshawlaw.com 312-704-3105 Direct: 6

Presentation Overview  Alternative Exit Strategies  Plan Design Considerations  Criteria for Evaluating Alternatives  What is a “Repurchase Obligation”?  Introduction to ESOPs  Corporate v. ERISA Fiduciary Standards  Profile of an Ideal ESOP Candidate  General Regulatory Framework  ESOP Corporate Governance  ESOPs and Other Retirement Plans  How Does an ESOP Work?  Summary of Pros and Cons of an ESOP 7

Alternative Exit Strategies Sell to a Sell to a Financial Sell to an ESOP Strategic Buyer Buyer 8

Alternative Exit Strategies Purchase Tax Form of Diversification and Price Considerations Consideration Liquidity Concerns Alignment of Legacy Time to Close Initiatives 9

An ESOP is an employee benefit plan subject to the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the regulations issued thereunder. 10

Introduction to ESOPs Designed to invest primarily in employer securities (“Company Stock”):  Not subject to the 10% limitation in investments in employer securities that apply to other ERISA plans; but  Participants have diversification rights under either Section 401(a)(28) or 401(a)(35) of the Code. 11

Introduction to ESOPs Not subject to the minimum funding requirements under Section 412 of the Code:  Although planning for future payment obligations to terminated employees is highly recommended. 12

Introduction to ESOPs Subject to certain conditions, selling shareholders of a C corporation may elect to defer taxes on the sale of Company Stock to an ESOP under Section 1042 of the Code.  If the seller makes a Code Section 1042 tax-deferral election, then certain allocations to the ESOP Accounts of the selling shareholder in a transaction to which Code Section 1042 applies, his family members, and any other 25% or more shareholder are then prohibited under Section 409(n) of the Code. 13

Introduction to ESOPs ESOPs can be leveraged, which effectively doubles the limit on deductible contributions (for C corporations only):  Contributions for general plan administration are deductible under Section 404(a)(3) of the Code  Contributions to enable an ESOP to service its Company Stock acquisition debt are deductible under Section 404(a)(9) of the Code  Not subject to the minimum funding requirements under Section 412 of the Code, although planning for future repurchase obligations with respect to terminated vested ESOP participants is highly recommended 14

Introduction to ESOPs BENEFITS TO PARTICIPATING EMPLOYEES  No deduction from their wages is required or permitted  Value of their ESOP benefits may grow over time  Potential retirement benefit based upon performance of Company Stock 15

Introduction to ESOPs BENEFITS TO PARTICIPATING EMPLOYEES  Participating Employees only have a “beneficial ownership” interest in shares of Company Stock allocated under the ESOP.  ESOP Trust is the legal or record owner. ESOP is not a direct stock purchase plan.  ESOP is not an Employee Stock Purchase Plan (“ ESPP ”) under Section 423 of the Code.   The ESOP is not a stock option plan (which grants participants the rights to acquire Company Stock at a future date). 16

Advantages of Selling to an ESOP SELLING SHAREHOLDER  Non-recognition of gain on sale for C corporation If a 1042 election is made, the plan must own at least 30% of the company’s stock immediately  following the sale to the ESOP  Facilitate partial or complete ownership transition 17

Advantages of Selling to an ESOP C CORPORATION  Tax deductible funds transfers to the ESOP Trust  Tax savings can be used productively – debt repayment, capex, acquisitions, etc.  Employer Contributions deductible under: Section 404(a)(3) of the Code  Up to 25% of the eligible “Compensation”   Aggregated with employer contributions to other defined contribution plans  Section 404(a)(9) of the Code  Up to 25% of the eligible “Compensation”  Only if contribution used to make exempt loan payments  Interest payments excluded  Dividends deductible under Section 404(k) of the Code Subject to certain conditions and restrictions  18

Advantages of Selling to an ESOP S CORPORATION  Future corporate income is “passed through” to the ESOP Trust (tax-exempt)  Tax deductible funds transfers to the ESOP Trust  Tax savings can be used productively – debt repayment, capex, acquisitions, etc.  Only the deduction for employer contributions under Section 404(a)(3) of the Code is available  S Corporation distributions may still be declared, and the ESOP Trust may use such proceeds to make exempt loan payments, however, the S distributions are not deductible. 19

Advantages of Selling to an ESOP EITHER C OR S CORPORATION  Positive impact on corporate cash flow:  Employer Contributions to the ESOP may be made in shares of Company Stock  Employer Contributions to the ESOP used to acquire shares of Company Stock (pre-tax dollars) in lieu of stock redemption proceeds (after-tax dollars) may significantly impact the Company’s cash flow availability on a post -transaction basis  Particularly helpful if the Company is trying to maximize tax deductions while complying with any financial covenants with senior lenders. 20

Advantages of Selling to an ESOP EMPLOYEES  Retirement plan with substantial benefits  Typically, independent studies have shown that ESOP corporations provide greater compensation and benefits  Aligns incentives of management and employees through ownership interest- powerful tool for recruitment and retention 21

Profile of an Ideal ESOP Candidate SELLING SHAREHOLDER CHARACTERISTICS  Desires Fair Market Value  Seeks personal wealth diversification  Would like to take some value out of corporation on a tax-deferred basis  Seeks to preserve corporation and employee legacy  Wishes to provide employees with economic benefits 22

Profile of an Ideal ESOP Candidate SPONSORING CORPORATION AND EMPLOYEE CHARACTERISTICS  Sufficient balance sheet strength to absorb ESOP acquisition debt (if any anticipated)  Sufficient cash flow from operations to cover all ESOP acquisition debt and other long-term debt service requirements  Historical and projected profitable operating performance (i.e., revenue generation and profit margins) 23