Mergers, Acquisitions, and Corporate Restructurings, Fourth Edition

Chapter 9. Employee Stock Ownership Plans

A large component of the dramatic growth of employee stock ownership plans (ESOPs) that occurred in the United States in the 1980s is attributable to their role in mergers, acquisitions, and leveraged buyouts (LBOs). Employee stock ownership plans are involved in mergers and 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 with their antitakeover efforts.

Employee stock ownership plans 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 specified how corporations could 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 ...