Buying Acquisition of Companies by an ESOP Company Selling Sale of an ESOP Company

Transcription

1 The ESOP Association California Western States Annual Conference October 6 7, 2016 Sharyl David, CFA, ASA Moss Adams LLP sharyl.david@mossadams.co m Lynn DuBois ESOP Law Group ldubois@esoplawgroup.com 1 Buying Acquisition of Companies by an ESOP Company Selling Sale of an ESOP Company 2 1

2 Buying Acquisition of Companies by an ESOP Company 3 Board determines acquisition goals and policy Company and ESOP culture Market Share and Growth Supplement Strengths Offset Weaknesses Acquisition Strategy Cost of the Process Acquisition Financing Integration of Operations and Culture 4 2

3 The Acquisition Team Board of Directors Company Officers Legal Counsel Accountant Financial Advisor ESOP trustee oversight capacity Little involvement if corporate transaction Material acquisition? Valuation FMV of deal, synergistic value, RO, tax savings 5 Identify targets Preliminary negotiation Letter of intent Financial/legal due diligence Financing commitments Definitive purchase agreement Board approval Closing 6 3

4 Provides exclusive negotiating relationship for a period of time Non binding but with confidentiality provision Summarizes key legal, financial, and tax terms along with transaction overview Outlines role of seller management and employees, post acquisition Commits both parties to proceed in good faith Establishes purchase price with provisions for upward or downward movement May include deposits, escrow amounts, break up fees, indemnification 7 Scope and Depth Financial Disclosures Customer Issues Industry Issues Environmental Issues Employee Issues Health Care and Benefit Plans IP and IT issues Other Potential Liabilities 8 4

5 Confirm target valuation resolve conflicts. How? Analyze potential liabilities/pitfalls Confirm acquisition fit to company goals 9 Reps and warranties, indemnifications, backed by escrow funds Protect acquirer from undisclosed or unknown real and contingent liabilities Preserve benefit of bargain for acquirer against contingent or undisclosed liabilities or adverse events 10 5

6 Buyers generally prefer asset purchase and sellers prefer stock sale 100% S ESOP may be indifferent from tax perspective Liability issues addressed in representation and warranties ESOP company acquirer may be able to deliver Section 1042 capital gains tax deferral to selling shareholders of Target Earnout structures 11 Corporate acquisitions generally require Board but not shareholder approval Shareholder approval required to issue additional shares if necessary as part of acquisition Pass through required if merger involved If majority ESOP owned, do we need a fairness opinion Fairness opinion by Company s financial advisor to board may be appropriate. 12 6

7 Selling Sale of an ESOP Company 13 Changing risk profile Market conditions Liquidity needs Non ESOP shareholders want an exit without selling additional shares to the ESOP Unable to re pay debt from operating cash flows Repurchase obligation issues Receive an unsolicited offer Need for a new capital structure 14 7

8 Board of Directors Develops Policies and Procedures for Sale Process/Hires Advisors Senior Management receives Offer/Confirms Offer is Bona Fide ESOP Trustees and its advisors analyze the offer Board of Directors reviews offer/recommends approval or disapproval Buyer due diligence, negotiation and documentation of transaction Post Closing issues 15 Should there be a policy developed to memorialize the objectives for maintaining ESOP ownership Policies and Procedures to address how to handle unsolicited offers Consider? Ask for clarification Too good to refuse Need to shop the Company? 16 8

9 Real or bona fide offers Duty to information board or ESOP trustee? Offers to buy the Company are bona fide if: Proposed consideration is nominally adequate Other proposed deal terms are fair and reasonable Proposed Buyer financial ability to pay the proposed purchase price 17 Board is subject to Business Judgment Rule and should take into account: Value to shareholder(s) Culture and independence Employees Alternative purchasers Continuity of business 18 9

10 May inform early in process So not surprised So can move faster to next stage Must inform if bona fide Offer Inside Trustee should resign Board appoints outside, independent Trustee to evaluate deal Trustee engages own counsel and own financial advisor 19 Role depends upon whether company is majority or minority ESOP owned With minority ESOP owned company, trustee has little, if any, input Trustee has duty of good faith and a higher standard of care (no protection under the Business Judgment Rule ) Trustee considers Absolute Fairness, Relative Fairness and Adequate Consideration in evaluating offers to sell the Company Does the offer exceed fair market value (Absolute Fairness)? Would the ESOP receive its fair share of transaction proceeds (Relative Fairness)? 20 10

11 Is the ESOP trustee required to sell if the offering price is greater than the appraised value of the Company? Evaluate the sale process and the buyer Act solely in the best interest of the ESOP participants Trustee can only consider financial criteria Trustee cannot consider loss of jobs, effect on community, etc. Consider the long term prospects of the Company 21 Key to Trustee s analysis is absolute vs. relative fairness ESOP trustee will ask financial advisor to render opinion to effect that: Consideration for the ESOP shares is at least equal to fair market value (absolute fairness) and transaction terms are fair to the ESOP from a financial point of view (relative fairness) Typical relative fairness issues: Employment agreements for management, bonuses, severance agreements and change in control payments Payments by company of legal and other fees incurred by other shareholders and/or executives Contingent payments and earnouts Scope of ESOP s representations and warranties Liability of ESOP for indemnification 22 11

12 Can the ESOP trustee agree to an earn out? Can escrowed fund/earn outs/holdbacks be considered a part of the purchase price for purpose of determining Adequate Consideration and Fairness? Can the trustee take into consideration any other nonfinancial factors in evaluating the proposed transaction? 23 Participant voting requirements Repayment of ESOP debt/remaining shares in suspense account Plan termination/disposition of plan assets/full vesting 24 12

13 Every ESOP Company should have a policy to address the potential sale of the Company Avoid conflicts of interest between corporate fiduciaries Hire experienced advisors

14 Sharyl David, CFA, ASA, Senior Manager Moss Adams LLP (916) Lynn DuBois, Partner ESOP Law Group LLP (415)