Presented By: DANIEL N. JANICH Is an ESOP Right for You? Presented By: DANIEL N. JANICH Holifield Janich & Associates, PLLC 20 North Wacker Drive, Suite 4200 Chicago, IL 60606 djanich@holifieldlaw.com Telphone: (312) 332-4222 Fax: (865) 566-0119 www.holifieldlaw.com www.holifieldlaw.com

What is an ESOP?   An ESOP is a tax-qualified retirement plan funded solely by employer contributions and designed to invest primarily in employer stock May only be adopted by corporations Different tax rules apply to C corporations and S corporations that establish ESOPs www.holifieldlaw.com

What is an ESOP? www.holifieldlaw.com   ESOPs subject to same general requirements under Internal Revenue Code and ERISA as other types of tax-qualified retirement plans Minimum coverage Eligibility Nondiscrimination Vesting (6-year graded or 3-year cliff) Reporting & Disclosure (Form 5500, SPD, etc.) ERISA fiduciary standards (but ERISA’s diversification requirement does not apply) www.holifieldlaw.com

Special ESOP Requirements   Stock sold or contributed to the ESOP must be common stock of the employer (with the greatest dividend and voting rights) or preferred stock convertible into common stock Stock must be valued by an “independent appraiser” at time of transaction and then annually For privately held companies, ESOP participants permitted to direct how their account shares are to be voted in certain corporate matters. ESOP trustee votes participant shares on all other corporate matters. www.holifieldlaw.com

Special ESOP Requirements   Special distribution rules apply Right to receive payment in stock (except for S corporations) Participants who receive stock distribution can require company to buy back shares at FMV (Put Option)  Repurchase Liability Company (not ESOP) must plan future cash needs to pay benefits in cash or buy back stock  Employee Diversification Rights Employees age 55 with 10 years of ESOP participation may diversify 25% of their account over 5 years and up to 50% in 6th year. www.holifieldlaw.com

Why Consider an ESOP? www.holifieldlaw.com   For privately held companies, ESOP creates a market for company stock Tax Advantaged Exit Option: C corporation owners can sell their shares to ESOP on tax-deferred basis (if certain requirements are satisfied) Employee-Advantaged Option: Employees not terminated when owner exits the company (which may occur upon 3rd party sale) www.holifieldlaw.com

Why Consider an ESOP? www.holifieldlaw.com   Owner-Advantaged Option: ESOP allows owner to gradually give up ownership by selling company to ESOP in stages while remaining involved in company management Ownership Culture: Employees as shareholders have “skin in the game” and statistics have shown employee owned companies are some of the most productive and profitable in their industry ESOPs provide significant tax savings for ESOP-owned S corporations www.holifieldlaw.com

Example of How Typical Leveraged ESOP Transaction Works – $5M Sale of Stock www.holifieldlaw.com

Example of How Typical Leveraged ESOP Transaction Works – $5M Sale of Stock www.holifieldlaw.com

The Players: Who is Involved in an ESOP Transaction?   Board of Directors ESOP Committee ESOP Trustee – Internal or Independent Independent Appraiser ESOP Record keeper Others www.holifieldlaw.com

Who Are the Fiduciaries?   ESOP trustee & ESOP Committee Board of Directors ERISA’s fiduciary duties of prudence, best interests of participants, and follow plan documents apply Understanding of fiduciary obligations is critical before establishing ESOP Most of the ESOP litigation arises from a breach of fiduciary duty www.holifieldlaw.com

Is Your Company a Good Candidate for an ESOP? Are you a corporation (C or S)? Do you have shareholders who will sell all or some of their stock to an ESOP? Will your company have a strong secondary management team in place after an ESOP is adopted and current shareholders are bought out? Has your company enjoyed successful operations for at least several years? EBITDA >$5M   www.holifieldlaw.com

Is Your Company a Good Candidate for an ESOP? Is company management willing to undertake the administrative and ERISA fiduciary responsibilities of maintaining an ESOP? Does the company have strong earnings and cash flow to handle ESOP stock acquisition debt? Will the payroll of ESOP participants be enough to support the company contributions required to satisfy the ESOP loan repayment obligation?   www.holifieldlaw.com

How Do You Get Started? www.holifieldlaw.com Hire experienced ESOP legal counsel and consultants Conduct a feasibility study Secure financing (leveraged ESOP) Trustee to obtain independent valuation of company stock Prepare ESOP plan documents (ESOP design considerations) Negotiate stock purchase agreement (ESOP Trustees – Selling Shareholders) Take steps to create a “culture of ownership” among employees Communicate the ESOP to employees—obtain the “buy in” at the outset   www.holifieldlaw.com

A Few Helpful Introductory Resources September 1, 2016 Online Article: Why You Should Let Your Employees Own Your Company– www.ozy.com/pov NCEO Books available for purchase at www.nceo.org An Introduction to ESOPs - How ESOPs work Leveraged ESOPs and Employee Buyouts –Financing of leveraged ESOP transaction (legal/valuation/accounting) Understanding ESOPs – General, Basic Guide S Corporation ESOPs –Unique issues for ESOPs sponsored by S corporations Selling Your Business to an ESOP – Guide for owners considering sale to ESOP Don’t Do That – Common mistakes in implementing and operating an ESOP and how to avoid them For local ESOP chapters: www.esopassociation.org   www.holifieldlaw.com

Our ESOP Practice www.holifieldlaw.com Our lawyers are nationally recognized trusted ESOP advisors experienced in all aspects of the ESOP life cycle, including the design, establishment, maintenance and termination of ESOPs. We advise selling shareholders, lenders, trustees and plan fiduciaries in ESOP transactions involving corporate acquisitions and mergers, establishment of a plan to incentivize the work force or to ease a business ownership transition and succession, use of an ESOP as a financing tool for management and leveraged buyouts, and in connection with shareholder liquidity events. We develop executive compensation plans and arrangements suitable for ESOP owned companies.   www.holifieldlaw.com

Our ESOP Practice www.holifieldlaw.com Our ESOP litigators have a wealth of specialized in-depth experience in addressing ESOP-related disputes representing ESOP sponsors, plan administrators, Board members, investment bankers, internal and outside trustees, valuation professionals, and other ESOP professional advisors, in courts throughout the country as well as in audits before the Internal Revenue Service and the Department of Labor. For more information contact Dan Janich at (312) 332-4222; djanich@holifieldlaw.com   www.holifieldlaw.com

Holifield Janich & Associates, PLLC Questions? Daniel N. Janich Holifield Janich & Associates, PLLC djanich@holifieldlaw.com (312) 332-4222   www.holifieldlaw.com