AC 23 Concurrent Session 5

Basic ESOP Distributions / Repurchase Liability

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Sr. ESOP Administrator

Blue Ridge ESOP Associates Phone: (312) 651-6319

kkuster@blueridgeesop.com

www.blueridgeesop.com

Kip is a Sr. ESOP Administrator at Blue Ridge ESOP Associates focused primarily on ESOP administration, repurchase obligation studies, pre-transaction ERISA compliance testing, plan design, and From 5500 preparation. Kip is a member of the National Center for Employee Ownership, American Society of Pension Professionals and Actuaries (ASPPA), the ESOP Association, and an associate member of The ESOP Association’s Advisory Committee on Administration.

CEO & President

PenChecks Trust

Phone: (800) 541-3938

Spiro@penchecks.com

www.penchecks.com

SPIRO PREOVOLOS

Since joining PenChecks in 2002, Spiro has held several different positions including Director of Operations, Director of Sales & Marketing, and VP of Strategic Development. In his current role as President & CEO, Spiro’s primary focus is on growth, cultivating strategic partnerships and initiating the development of new products and services to keep the company at the forefront of the rapidly changing retirement plan industry. In more than 20 years with PenChecks, there's not much Spiro hasn't see when it comes to distributions and missing participants.

Covered Topics

 Sponsor Concerns

 Distribution Policy

 Payment Procedures

 Best Practices for Missing Participants

Definitions

1. DISTRIBUTION

A payment or disbursement of benefits from the ESOP. Can occur or be triggered for a variety of reasons. Sometimes confused with distributions of S-corp profits (“dividend”).

2. REPURCHASE OBLIGATION

What the sponsor is liable for if participants exercise their put option. Can refer to a single year or a span of multiple years.

Sponsor Concerns

• Financial

- What is the impact on annual cash flow?

- Is the current policy sustainable over time?

• Administrative

- Is our policy easy to communicate and understand?

- How difficult is it to administer the policy?

• Cultural - Does it properly incentivize employee actions?

Distribution Policy Basics

Governs the payment of ESOP distributions

- Adopted by the sponsor

-

Plan administrator executes the policy

- Trustee funds the distribution

Must follow IRS timing rules

- IRC § 409(o) Special Accelerated Rule for ESOPs

- IRC § 401(a)(14) General Rule for Qualified Plans

• Be administered in a uniform and nondiscriminatory manner

- Cannot favor certain participants over others in the same class

Distribution Policy Types

• RIGID PLAN DOCUMENT

- Specifics are written in the plan document

- No discretion to the plan administrator

- Any changes to policy requires a plan amendment

• VAGUE DOCUMENT

- Provides discretion to the plan administrator

- Commonly written to statute

- Often accompanied by a written, internal policy document

Distribution Triggers

Separation Diversification

• Death

• Age 55

Other In-Service

• Not required

• Permanent Disability

• 10 years of participation

• Retirement

• Any other voluntary or involuntary termination

• Qualified Election Period lasts for 6 years.

• Often seen triggered at Normal Retirement Age

• Year 1-5: 25%

• Year 6: 50%

Distribution Policy Decisions

• When does distribution commence?

Usually no more than 6 years after termination

• How many payments occur?

Typically, five annual payments (more for larger accounts)

• In what form is the payment made?

Cash or Employer securities

• Consent requirements

Can “force out” balances up to $5,000 ($7,000 beginning in 2024)

• Your policy can be more beneficial than statute requires.

Distribution Policy Timing Rules

§409(o) – ESOP Special

• Term’d as a result of “DDR”

No later than the year after termination.

• Non-DDR

No later than the 6th year after termination.

• 5-year Limited Dist. Period

• Financed Securities exception

May exclude employer securities purchased with exempt loan

§401(a)(14) - General

• No later than the 60th day after the close of the plan year in which:

‧ Earlier of age 65 or Normal Retirement

Age

‧ 10th anniversary of participation

‧ Termination of service

Consent

• Generally, the affirmative election of the participant is required, unless:

- Vested balances up to $5,000

- Participant is age 62 or Normal Retirement Age (later)

- Death benefit to estate or beneficiary

- Payment is a required minimum distribution (“RMD”)

• “Right to Defer” notice must be provided

- Within 180 days of first payment

- At least 30 days before first payment

Income Tax Concerns

• Rollover to another qualified plan

- Any distribution except a required minimum distribution (“RMD”)

- No income taxes are recognized

• Non-rollover payment directly to participant

- Taxable income recognized in the year of payment

- Mandatory 20% federal withholding applies at payment

- If before age 59½: additional 10% excise tax will apply (unless terminated after achieving age 55, death, or disability)

- If distributed in form of stock (redemption) & single lump sum: Net Unrealized Appreciation (“NUA”) treated as long term capital gains

Distributions & Missing Participants

Background

• What is a Missing Participant?

Participant or beneficiary who can’t be located or does not respond to reasonable communication efforts

• What is an Uncashed Check?

Self explanatory; largely considered same as a missing participant in eyes of the government • Why Should You Care?

Fiduciaries must make reasonable efforts to locate MPs as part of duties of prudence and loyalty

Distributions & Missing Participants

Background

Why Else Should You Care?

Because missing participants affect plans

• Inability to pay plan benefits

• Failure to pay RMDs

• Failure to meet disclosure requirements

• Undelivered participant communications

• Uncashed checks

• Complicate plan terminations

Distributions & Missing Participants

Guidance

• Guidance was sparse for a long time

• Most guidance geared towards terminating DC plans

• 3 New guidance publications in 2021; focus on preventing missing participants

Google: “DOL Missing Participant Guidance”

- Missing Participants – Best Practices for Pension Plans

- Compliance Assistance Release 2021-01

- Field Assistance Bulletin 2021-01

Missing Participants Best Practices

• “Red Flags” may suggest a missing participant problem

- More than a small number of

‧ Missing/non-responsive participants

‧ Termed vested participants @ NRA

- Missing, inaccurate, or incomplete info

- Absence of sound P&Ps for returned mail

- Absence of sound P&Ps for uncashed checks

Missing Participants Best Practices

Four Main Practice Areas:

1. Maintain Accurate Census Information

2. Implement Effective Communication Strategies

3. Missing Participant Searches

4. Document Procedures and Actions

#1. Maintain Accurate Census Information

 Contact parts periodically to confirm contact info

 Include contact change info in all plan communications

 Flag undeliverable mail for follow-up

 Regularly request updated contact info for beneficiaries

 Search for missing participants during M&As

 Prompt participants to confirm contact info on online platforms

#2. Implement Effective Communication Strategies

 Use plain language & offer non-English

 Prominently state up front what comm is about

 Encourage contact through sponsor websites and numbers

 Onboarding and offboarding P&Ps

 Comm info about consolidating accounts

 Use original plan sponsor name on communication

#3. Missing Participant Searches

 Check related plan records

 Check with designated beneficiaries

 Use free online search resources

 Use commercial locator service

 Use death searches if missing for a long time

 Register on public & private pension registries (NRURB)

 Attempt contact via USPS-certified mail, email, phone, text, and social media

 Reach out to colleagues

#4. Document Procedures & Actions

 Reduce plan’s P&Ps to clear written instructions

 Document key decisions and actions taken

 Ensure third parties perform agreed-upon on services

‐ Work to correct shortcomings

Best Practices Summary

• DOL BPs are not binding and do not have force of law

- However, standard is out now

• Consider costs of particular search efforts given the circumstances

• Ensure procedures are designed to maintain contact with all participants

• Consider which BPs are likely to be effective and implement them as SOPs.

- Establish consistent process

- Have written documentation

- Follow it

Secret Word for CE

UMKC Kangaroos

Board Fiduciary Duties and Risk Mitigation

Lindsey R. Camp

Partner

Holland & Knight LLP

Clifford Canavera

President

Canavera Financial Group, LLC

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Introduction and Objectives

• Learn about the various roles and responsibilities of parties involved in ESOP-owned companies and their roles and responsibilities

• Develop an understanding as to the current trends in ESOP litigation impacting Board members

• Identify various ways to minimize risk associated with ESOP litigation

ESOP Owned Company Parties

• Board of Directors

• Governing body of the company

• Acts on behalf of all shareholders

• Management Team

• Generally, the senior employees of the company

• Runs the day-to-day operations of the business

• ESOP Trustee

• Acts on behalf of the ESOP as shareholder

• ESOP Committee/Plan Administrator

• Responsible for ESOP administration and reporting

• Gives direction to directed Trustee

Who Runs an ESOP Company?

• Every corporation is owned by SHAREHOLDERS

• Shareholders elect the BOARD OF DIRECTORS

• The Board of Directors evaluates MANAGEMENT

• MANAGEMENT (Chief Executive Officer) handles the dayto-day operations of the Company and manages the EMPLOYEES

• What about the ESOP?

• The ESOP is a shareholder and shareholder rights are generally exercised by the ESOP TRUSTEE

What is the Board’s Role?

• Approves the company’s strategic direction proposed by management

• Elects, oversees and advises management

• Evaluates significant corporate transactions

• Establishes and maintains corporate governance practices

• Establishes and oversees executive compensation programs

• Appoints, monitors and/or removes the ESOP Trustee (unless delegated)

Board Committees

• Can allocate or delegate duties to individuals or committees

• Power determined by allocation or delegation document(s) or charter

• Common Board Committees:

• Audit: approves budgets and projections, financial statements and audits

• Compensation: determines compensation of board and management; oversees executive compensation and retirement plans

• Governance/Nominating: oversees regulatory compliance, Board and management; nominates new directors

• Special: can be formed for specific purpose

Board Operations

• Should operate and make most decisions at regularly scheduled meetings

• Generally, should hold at least quarterly meetings

• Special meetings may be called at special intervals

• Committee meetings should also take place, but do not have to be at same intervals or same time

• Subject to state law, can be via phone or video conference

Who Should Be On The Board?

Answer Differs By Company

• Requirements:

• Understand and be committed to governance process

• Ability to think strategically

• Interest and time to commit to process

• Considerations

• Balance

• Dynamics

• Specific Skills and education

• Personal Style

Who Should Be On The Board?

• Size - Usually between 3 and 9 people

• Experience - Consider familiarity with company vs. new perspectives

• Competencies - Good mix of skills support variety of goals and functions

• Diversity - Different background brings different viewpoints

• ESOP Experience - Challenges facing ESOP companies are different from other companies

• Inside vs. Outside Director - Whether director has a previous relationship with the company

Inside Directors

• Typically, executives currently employed by the Company, though often times the CFO is NOT on the Board

• Important to separate role of employee from role as director

• Review candidates to be sure that they meet the Board of Directors’ criteria:

• Should not be afraid to speak up

• Should have significant business skills

• Should be nimble enough to react to changing business situations

Potential Limitations of Inside Directors

• May not be aware of market-wide risk factors

• May not be able to challenge management as well as an outsider

• May not be able to be as impartial as an outsider

• Increased potential for conflicts

• Lack of Outside Voice/Expertise

• May not been viewed as having credibility

Outside Directors

• Not necessarily independent; just someone who is not an employee of the Company

• May be required by ESOP Trustee as part of initial formation transaction

• Brings outside experience based on their previous business background

• Should review conflicts before accepting appointment

• Likely will expect compensation for serving in role

Potential Benefits of Outside Directors

• May bring market-wide risk factors to attention of Board

• More likely to be able to challenge management

• Greater impartiality

• With proper vetting, less likely to have conflicts

• May be perceived as having additional credibility

Board Governing Rules

• Applicable State Law

• Company’s Articles of Incorporation

• Company’s Bylaws • Other Corporate Governance Policies and Procedures

ESOP Trustee Requirements

ERISA

Board’s Duties Under State Law

• Corporate Fiduciary Standards

• Duty of Care

•

Duty of Loyalty

• Reviewed under the Business Judgment Rule

• Courts do not second guess the Board’s business decisions when such decisions are made:

• In good faith

• With the care that an ordinarily prudent person in a like position would exercise under similar circumstances

• In a manner that is reasonably believed to be in the best interests of the company

Duty of Care

• Investigation and Deliberation

• Informed Decision Making

• Must be informed of “all material information reasonably available” before acting

• Monitor Corporate Operations and Compliance

• Must receive enough information to understand results of operations, variations from budget, business trends, etc.

• Review Management and confirm whether:

• Proper risk management assessment has been completed and proper risk management policies have been adopted

• Adequate internal controls for financial and legal obligations have been adopted

Duty of Loyalty

• Independence and Transparency

• Conflicts of Interest

• Usurpation of Business Opportunity

• Competition with Company

Disclose, Disclose, Disclose

ESOP-Specific Duties

• There are no separate specific statutory requirements for ESOP Company Boards BUT:

• ESOP Boards must appoint, monitor and, if necessary, remove the ESOP Trustee (ERISA fiduciary obligations)

• ESOP Boards should read and understand the annual valuation report

• ESOP Boards must understand how the laws applicable to ESOPs and how benefits are provided to ESOP participants

• ESOP Boards must more carefully scrutinize potential conflicts of interest

• ESOP Boards should take a more active role than that of a private company Board

ESOP Fiduciary Duties

• When serving as an ERISA fiduciary, the Board MUST ACT:

• Solely in the interest of plan participants and beneficiaries;

• For the exclusive purpose of providing benefits to participants and their beneficiaries;

• Defray reasonable expenses of administering the ESOP;

• With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting with like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

• In accordance with ERISA and the ESOP Plan document

Two-Hats Doctrine

• What happens if you are a Director and an ERISA Fiduciary?

• Must comply with both sets of legal duties

• Must keep separate when acting in one role or the other

• i.e., think about what “hat” is being worn when making a decision

• Separate when making fiduciary and non-fiduciary decisions

• Consider having separate meetings to make such decisions

Director Liability – State Law

Breach of corporate fiduciary duty

• Failure to act prudently/exercise care

• Failing to assess corporate risk in a timely manner

• Declare dividends or distributions that affect the Company as a going concern

• Failure to be loyal to the Company

• Personally benefiting at the expense of the Company

• Approving a contract that disproportionately benefits the Director

Trends in Board Litigation

• Failure to monitor appointees (such as ESOP Trustee)

• Halperin v. Richards (7th Cir. 2021)

• No ERISA preemption of state law fiduciary duty claims against “two hat” directors

• Indemnification

• Sources of indemnification

• DOL’s position on indemnification of ESOP fiduciaries

Arabia Steamboat Secret Word

Best Practices For Defending and Minimizing Litigation

• Vet Board advisors, trustee candidates, trustee advisors, and Plan service providers

• Fiduciary training

• Documentation of key decisions and understanding of privilege

• Review of insurance

• Review of indemnity obligations

• Process, process, process

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Learning Objectives

I. Understand the role of different advisors supporting a company throughout an ESOP transaction

II. Learn when it is advisable to include an investment banker in the process of establishing an ESOP transaction

III. Identify the pros and cons and value proposition with respect to various processes and fees in establishing an ESOP transaction

I. Definition and Roles of “Advisors”

II. “Traditional” ESOP

III. “Current” Transaction Considerations

IV. Case Studies with examples of:

I. When to use an investment banker

II. When you don’t need to use an investment banker

III. Sense of what the right team of advisors is when

V. Costs

Definition and Roles of “Advisors”

a) ERISA Attorney

b) Plan Administration

c) ESOP Trustee

• For a transaction

Learning Objective 1

Understand the role of different advisors supporting a company throughout an ESOP transaction

• Ongoing

d) Valuation

• Company

• Trustee

Definition and Roles of “Advisors” (Cont.)

e) Lender

f) Investment Banker

• Feasibility

• Modeling

• Iterations

• Quarterback

• Negotiations

• Project Management

Learning Objective 2: When do you need an investment banker?

The complexity of needs in the transaction drives the allocation of the roles among the advisors

Each transaction is different; set fees accordingly

Traditional ESOP

Example Project Management:

Project Manager

1. Project manager works with selling shareholder on feasibility and design of ESOP transaction

• ESOP Plan Administration

• ERISA Lawyer

• Lender

Company & Selling Shareholder

2. Project manager assists company and selling shareholder to interview and select a transaction trustee

ESOP Trustee & Valuation Firm

Current Transaction Considerations

a) Suitability & feasibility

g) Valuation

b) Transaction structure

h) Synthetic Equity

c) Financing

d) ERISA and IRC compliance

i) Professional Service

Businesses

e) Project Management

j) Number of Selling Shareholders

f) Ancillary Legal and Tax Issues

• Corporate / commercial

k) Wealth Advisory

• Executive Compensation

l) Regulatory requirements

• S-Corp, C-Corp

m) Fairness

Current Case Studies

a) Examples where No Investment Banker is Required:

• Kevin to provide examples

b) Examples where an Investment Banker is Very helpful:

• Mary to provide examples

Learning Objective 2 & 3: When do you need an investment banker?

Identify the pros and cons and value proposition with respect to various processes and fees

When Might You Not Need an IB?

a) Not “going to market” to consider non- ESOP alternatives

b) Not seeking complex financing beyond standard senior bank financing

c) Traditional advisors can well meet company and shareholder needs

d) Simpler straightforward transaction

• Minority ESOP

• Number and psychology of selling shareholders

• Size and industry

• Earnings “story”

e) Pricing is cost prohibitive

Illustrative Fee Estimates: $250m Trans.

1) Company corporate and ESOP counsel costs are highly variable depending on existing agreements, firms used, and amount of legal work required by the transaction

2) The wide range is a function of the caliber of company counsel and any unique issues that arise

3) Based on current relationships and final structure

Illustrative Fee Estimates: $30m Trans.

1) Company corporate and ESOP counsel costs are highly variable depending on existing agreements, firms used, and amount of legal work required by the transaction

2) The wide range is a function of the caliber of company counsel and any unique issues that arise

3) Based on current relationships and final structure

Secret Word for CE

Wildcat

Questions?

ESOP History – 1970-2000

I. ESOPs were generally:

1. Alternative to strategic or going public

a) Private equity had not developed as an Asset Class

b) Sometimes viewed as “buyer of last resort”

2. Prevailing tax benefits:

a) 1042 – deferral of capital gains to seller

b) Bank ability to shelter some interest income revenue

c) Lower cost of financing

d) Corporate tax deduction equal to the ESOP contribution

3. Partial C-Corp Transactions

a) Only C-Corporations were eligible ESOP shareholders

ESOP History – 1970-2000 (cont.)

4. Single to Small Number of Selling Shareholders

5. “Single bank” transactions

a) Today this segment is often referred to as “business banking”

b) Syndicated loan markets were an exception

c) Legacy partnership and professional services were an exception

6. Staged Transactions

7. General industries

a) Industrial

b) Construction

c) Retail

d) Less business and professional service companies as a subset of the economy

ESOP History – 1970-2000 (cont.)

The simplicity of the size, industry, and general ownership of these companies, made knowledgeable and experienced professional teams highly effective for ESOP implementation

II. General Advisory team:

1. ERISA Lawyer

2. Plan Administrator

3. Trustee

4. Valuation firm

ESOP History – 2000-Present

I. Market Evolution:

1.

Rise of Private Equity as an asset class

a) ESOP’s are a financial buyer similar to private equity

b) Financial buyers are a competitive transaction alternative

2. Legal modification allowing S-Corporations to be a valid ESOP shareholder

a) Counts as a single shareholder

b) ESOP exempt from federal income tax

c) Legal clarification in the anti-abuse provisions in June 2001

d) Steady increase in popularity of S-Corporation ESOPs

e) Feasibility analysis often evaluates practicality of zero – 100% ESOPs

f) Relative decline in 1042 transactions

ESOP History – 2000-Present (cont.)

3. Rise in Professional Service Businesses as Percent of Total US Businesses

a) Offshoring manufacturing contributed to the shift

b) Professional service firms generally do not have access to a key tax benefits (depreciation) commonly used by industrial companies to shelter income taxes

4. Can be Dozens to Hundreds of Selling Shareholders

a) Private equity and corporate divestitures join private business owners, evaluating ESOPs as an exit strategy

5. Rise in Larger, Multi-bank Transactions

a) Successful C-Corporation ESOPs making an S election

b) Service companies (engineering, consulting, advisory, etc.) transitioning from partnership models to S-Corp ESOP models

6. Rise in Lender Expertise

ESOP History – 2000-Present (cont.)

7. Rise in Non-bank Financing Alternatives

a) Uni-tranch

b) Private placement

c) Direct lending

d) Structured equity

e) Private equity

f) Social Impact funds

g) ESG (run by John to see if he would add anything)

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Current Economic

Current Economic Environment

• Continued Impacts of Covid-19

• Consequences of Silicon Valley Bank

• Labor Shortages and Supply Chain Woes

• Inflation Concerns

• Industry Stressors

Corporate Governance in Times of Financial Challenge

Duties of the Board

• Duty of Care

• Directors and officers must inform themselves of “all material information reasonably available to them” prior to making a business decision

• Directors and officers must “act in an informed and deliberate manner”

• Duty of Loyalty

• Directors and officers have an “affirmative duty to protect the interests of the company, but also an obligation to refrain from conduct which would injure the company and its stakeholders or deprive them of profit or advantage”

• Directors and officers must “eschew any conflict between duty and self-interest.”

• Encompasses duty of good faith, which requires that directors and officers act with intent to further stakeholder interests and in what they believe to be the best interests of the company

• To the extent that directors and officers are also equity holders, they should be careful to distinguish between actions taken on behalf of and in the interests of equity holders and actions taken on behalf of and in the interests of the company

How Duties Change When Insolvent

• The directors and officers of a company owe their fiduciary duties to the company, for the benefit of its stakeholders - which stakeholders may obtain standing to bring a claim for breach of fiduciary duty depends on whether the company is solvent or insolvent

• Solvent Company - Only stakeholders may obtain standing

• Insolvent Company - Both stakeholders and creditors may obtain standing

• Directors and officers have a duty to maximize the value of the company for all residual claimants

• Creditors are first in line

• Stakeholders are the residual beneficiaries of anything beyond what is necessary to satisfy the claims of creditors

• Because the moment of insolvency can be difficult to determine, directors and officers of a should seek to serve both stakeholders

• Directors and officers of a parent company whose wholly-owned subsidiary is insolvent owe a fiduciary duty to such subsidiary and, derivatively, to its creditors

• Best practice is to make decisions rationally designed to increase the value of the company as a whole

Tests for Insolvency

• Courts use three tests to determine whether a company is insolvent

• Equity Test (i.e., the cash flow insolvency test)

• A company is insolvent if it is unable to pay its debts as they become due

• Balance Sheet Test

• A company is insolvent if the sum of its debts exceeds the “fair saleable” value (which is not “fair market” value) of its assets

• The balance sheet test is not based on GAAP, but instead looks to the fair saleable value of assets and stated value of liabilities

• Adequate Capital Test

• A company is insolvent if it does not have adequate capital to operate the business

• Directors may need expert opinions on whether the company is solvent

• The advice of advisors may be evidence considered by a court if the insolvency determination of the directors is later challenged

Good Corporate Governance

• Conduct quality board meetings (e.g., agendas, preparation and distribution of materials, robust discussion, timing of meetings)

• Closely review all material information prior to making decisions and involve counsel in drafting meeting minutes to ensure clear documentation of the deliberation process

• Hire advisors to investigate specific issues, educate board members, and present their analysis

• Independently evaluate assumptions and information presented by advisors

• Do not merely be passive recipients of advice; ask questions of advisors until satisfied as to all issues

• Make decisions as if directors owe fiduciary duties to both creditors and stakeholders.

• Seek to preserve/enhance the maximum value of the corporate enterprise

Good Corporate Governance (Cont.)

• Build a thorough record of actions that fully reflects that the Board met its duties of care and loyalty to all constituencies

• Permit all decisions related to “insiders” (i.e., conflicted officers/directors) to be made by independent and disinterested directors

• Establish committees (e.g., audit, executive, finance, transaction-specific).

• Review organizational documents (e.g., budget, strategic plan, operations overview)

• Refrain from engaging in overly risky strategies that may only serve to benefit certain stakeholders

• Do not give preference to one stakeholder or class of stakeholders over another

• Be honest and disclose all material relevant facts, including any situations that may compromise independence

Polling Question #1

Who makes the decision as to a restructuring of the Corporate Debt?

Answer #1 The Board.

Duties of the ESOP Trustee

• The duties of the ESOP Trustee do not change based on the insolvency of the company

• The duties of the ESOP Trustee remain solely to its stakeholders – the ESOP participants and beneficiaries BUT

• Where the ESOP is the majority stakeholder or the sole stakeholder of the company, the ESOP Trustee’s oversight of the Board, where the company could be considered insolvent, should be with a view to the shifting duties of the Board, i.e., duties now owed to stakeholders and creditors

• Duty to maximize the value of the company for all residual claimants

• Creditors are first in line as the residual beneficiaries of any increase in the value of the company

• Stakeholders are the residual beneficiaries of any potential increase in the value of the company beyond what is necessary to satisfy the claims of creditors

Importance of Board Makeup

• The makeup of a Board may afford protection to the Board generally

• Maintaining a minimum number of independent directors ensures that the Board will be able to effectively and fairly evaluate decisions related to insiders

• The business judgment rule is the default standard under which courts will consider whether directors and officers have fulfilled their fiduciary duties

• Under this rule, courts will not second-guess a decision by directors who were disinterested and independent, acted in good faith, and had a reasonable, informed basis for believing the action authorized was lawful and in furtherance of the company’s purpose

• Courts look to a Board’s decision-making process rather than substituting their own judgment for that of the board or otherwise proving the objective reasonableness of a decision

First Steps in Evaluating

Financial Challenges

Determine Your Runway

• Assess the company’s liquidity situation

• What liquidity does the company have

• What liquidity does the company need

• Note any upcoming maturities and the business’ ability to satisfy those obligations

• Evaluate covenant terms to determine whether there are existing or impending defaults

• Assess the impact of any default and applicable cure periods

• Consider the implications of missed targets on the ability to achieve longer term projections and revise business plans accordingly

• Assess the implications of mandatory expense reductions, the delay of capital expenditures, etc. and the ability to obtain subsequent financing

Communications with Vendors/Customers

• Evaluate the supply chain and other key components of operations, such as vendors, contract parties, and customers

• Consider whether these parties need support to ultimately protect the business

• Maintain connections with customers, as their habits, needs, and preferences change

• Assess the duration of contracts, renewal rights, termination rights and requirements, and force majeure provisions and consider whether contracts should be extended or canceled

• Consider the specific provisions of the contract and the ability to replace the contract

Focus on Keeping Employees Incentivized

• Develop communication strategy

• It is important to reassure employees in order to avoid a negative impact on the workforce and retention

• Consider employee retention or incentive plans for key employees

• The ongoing employment of key employees during a restructuring process is critical, as they will be most familiar with the business and best positioned to help make important decisions

• This is particularly challenging for an ESOP because of concerns regarding stakeholder value

Forbearance Discussions

• It may be necessary to approach lenders (3rd party and related), either because of an impending covenant default or to seek other relief

• Forbearance can extend runway for determining longer term solution

• When approaching lenders

• Be prepared, organized, and ready to share financial and operational information

• Present a plan for the business that demonstrates the outcome of the relief to the lenders and its impact on the borrower’s ability to repay lenders

• Ask for what the business realistically needs (plus some cushion), as it will be more difficult to approach lenders again in the future

• Lenders will want to confirm

• The stability of the business

• The feasibility of the business plan

• That the lender is properly protected

Out-of-Court Restructuring

Options and Limitations for ESOPs

Amend Current Credit Facility

• Has the benefit of working with parties with preexisting relationships

• Already know the business

• Already have money at risk they will want to protect

• Could be challenging if relationship is already strained

• Not likely to provide additional liquidity

• May not provide all that is needed to address the challenges

Additional Capital Raise with an ESOP

• Considerations for capital raises include

• Limitations on issuing new equity (S. Corp.)

• Tax issues with issuing new equity (S. Corp.)

• Differences from private-equity backed companies;

• Smaller universe of potential investors

• Inability to use convertible debt (S. Corp.)

• May be able to obtain sub debt or structured equity

• Determine if the S. Corp tax savings still matter

Restructuring of Seller Debt

• Defer/forbear or forgive payments due under Seller Debt

• Write down or exchange portion of Seller Debt in return for equity or synthetic equity

• Provides flexibility to the company by freeing up cash flow and offers the Seller appropriate return for reducing the amount owed

• Often friendly investor who already knows the business

• Seller protection from fraudulent conveyance challenge

• Conversion may vitiate some or all of S Corp ESOP tax benefit

ESOP Issues with Seller Debt Restructure

• Issuance of equity (including synthetic) has to be weighed against the viability of the company (and value of the ESOP) if the debt was not exchanged for equity

• ESOP will want to see that all other sources of capital (that do not require equity issuance) have been exhausted

• The exchange of seller debt for company equity may constitute a prohibited transaction if conducted at less than fair market value or in the absence of absolute and relative fairness to the ESOP

• Further, regardless of cause or basis in fact, if the company’s insolvency is within the statute of limitations (6 years) of the ESOP’s equity purchase, careful consideration must be given to potential ERISA fiduciary breach claims alleging that the ESOP overpaid originally

• Will impact 409(p) testing if company is operating as an S Corporation

• Increase in synthetic equity

• Potential decrease in ESOP stakeholders if layoffs have occurred

Polling Question #2

The Board must receive a fairness opinion on the restructuring of Corporate Debt?

Answer #2

Fraudulent Conveyance

• The Bankruptcy Code allows fraudulent conveyances to be voided if there is actual or constructive fraud

• Fraudulent conveyances require

• A transfer of the debtor’s property or interest in property

• A two-year look-back period

• An actual fraudulent conveyance also requires that the debtor transferred assets (or incurred obligations) to a third party with an actual intent to hinder, delay, or defraud any creditor or future creditors of the debtor

• A constructive fraudulent conveyance also requires that

• The debtor received less than reasonably equivalent value

• The debtor was insolvent at the time of the transfer or was rendered insolvent as a result

Sale of All or Part of the Business

• Depending on liquidity needs and specifics of the business, it may be able to sell a portion of the business to raise necessary liquidity

• Evaluate appropriateness of running a sale process and a potential sale transaction

• Consider impact on the ESOP

• Buyer unlikely to want to take ESOP or any portion thereof

• Sale of entity or assets and related workforce will result in termination of those individuals (partial termination of ESOP?) from ESOP participant and thus may acerbate cash flow issues through increased repurchase liability

• 409p Testing – decrease in overall stakeholders

• ESOP Loan Servicing – contribution limitations

• Even if the company is insolvent, the ESOP Trustee may demand a portion of the sales proceeds to not contest the sale in bankruptcy

Extending the Maturity of an ESOP Loan

• Careful assessment of the costs and benefits conferred upon the ESOP and the likely consequences of a failure to refinance on the company

• Refinancing may also benefit the employer (for example, by reducing the employer’s cost of providing future contributions on an annual basis), but ESOP Trustee must act with undivided loyalty to the participants and beneficiaries

• Inducements for the ESOP Trustee plan to engage in the refinancing

• shares held in suspense account not applied to repayment of the outstanding portion of the refinanced loan if the ESOP is terminated (often referred to as "event protection")

• additional diversification rights for participants

• an increase in the amount of the employer's matching contribution

• the payment of a "dividend make-whole" to compensate participants and beneficiaries for the increased use of dividends for loan repayment

• Whether the sponsoring employer has made an enforceable commitment to make contributions necessary to retire the loan is deciding factor in inducements the ESOP Trustee will require

Polling Question #3

It is not legally permissible to refinance an ESOP Loan?

Answer #3

Chapter 11 and 7 Filings

Differences Between Chapter 7 and Chapter 11

• A chapter 7 bankruptcy is for liquidation

• A trustee is appointed and runs the process to liquidate and distribute assets to creditors

• No discharge is granted to non-individual debtors

• Involves lower costs than a chapter 11 bankruptcy

• A chapter 11 bankruptcy may be pursued for a liquidation or a reorganization

• Management and the Board of Directors continue to control and operate the business and properties in the ordinary course of business with judicial oversight

• A discharge of debts is granted to the debtor

• The process is generally more costly and lasts longer than a chapter 7

Automatic Stay

• Upon filing of chapter 11 petition, automatic stay immediately goes into effect

• The automatic stay provides a debtor with protection from adverse actions based on prepetition obligations

• Prevents new lawsuits from being filed against the debtor outside the bankruptcy court

• Stays continuation of all pending litigation

• Prevents even at-will termination of contracts by counterparties without court approval

• Creditors that take actions to violate the automatic stay may be subject to sanctions

• The automatic stay does not provide the debtor with absolute protection, as the stay may be lifted following a showing of cause

DIP Financing

• A debtor typically funds its reorganization efforts through one of two mechanisms

• Obtaining “debtor-in-possession” (or “DIP”) financing

• Using cash on hand (“cash collateral”)

• Bankruptcy Court approval of either method of funding is usually sought as a “first -day order”

• DIP financing is often senior to all other debt

• Either the cash collateral or DIP financing order will contain certain conditions (usually negotiated with the DIP lenders or the lenders who hold a lien in the cash collateral) relating to

• Timing of the case

• Reporting/consent procedures for payments of a certain kind or size

• Procedures for reimbursement of lenders’ professional fees and expenses

• Provision of “adequate protection” (e.g., liens on unencumbered property, super priority administrative liens, etc.)

Bankruptcy Constituencies

• A debtor faces numerous constituencies in chapter 11

• New constituencies may include

• The U.S. Trustee is an arm of the Department of Justice and is responsible for overseeing the administration of the bankruptcy cases

• The bankruptcy judge will not be involved in day-today operations of the company but will rule on transactions outside the ordinary course of business and the implementation of chapter 11 relief

• If appointed and necessary, the creditors’ committee will include a small number of the debtor’s biggest creditors and will represent the interest of the debtor’s creditors generally

• The chapter 11 process allows the debtors to bring all constituents—even those that would like to disrupt the process—into a single forum: the bankruptcy court

Debtor

Equity Committee

Creditors’ Committee

Ad Hoc Committees

United States Trustee

Bankruptcy Judge

Lenders

Creditors Parties-inInterest

Equity Security Holders

Financial vs. Operational Restructuring

• It is important to understand at the beginning whether a business needs a financial or operational restructuring

• Financial restructuring focuses on addressing issues with the capital structure

• Operational restructuring focuses on business specific issues such as footprint and key contractual relationships

• This impacts the duration of the case and who the key parties will likely be

Bankruptcy Sales

• Section 363 of the Bankruptcy Code governs the sale of assets by a debtor outside the ordinary course of business during chapter 7 and chapter 11 bankruptcy proceedings

• A “stalking horse bidder” may be appointed in advance of the auction with the execution of a binding purchase agreement for purchase of assets, subject to higher and better offers at auction

• Under section 363, a debtor has the right, with court approval, to sell assets free and clear of liens, claims, and other encumbrances

• Purchaser can acquire assets from a distressed company with cleaner title than in an out-of-court sale, supported by a bankruptcy court order authorizing the sale

• Debtor can maximize recovery for the estate and have certainty of closing a sale

Contract Assumption and Rejection

• The Bankruptcy Code permits debtors to assume, assume and assign, or reject executory contracts and leases

• “Executory contracts” are contracts where performance is required by both sides of the agreement as of the petition date

• Damages of a rejected executory contract or lease treated as a prepetition unsecured claim

• Damages from rejected leases are capped by the Bankruptcy Code.

• Until the debtor determines whether to assume, assume and assign, or reject the agreements, the debtor and counterparty must continue to perform in the ordinary course of business

• A counterparty may not invoke clauses that provide for termination of the contract upon a filing of a chapter 11 case

• Such provisions are called “ipso facto provisions” and are generally unenforceable in bankruptcy

• Such provisions may be enforced when performance would be excused by operation of law, or the obligation is to make a loan or other financial accommodation

• A debtor may not assume or assume and assign “personal service contracts” without the counterparty’s consent

Clean Start

• A chapter 11 case typically culminates with the confirmation of the debtor’s plan of reorg

• The plan should be the result of negotiations among the debtor and key constituencies

• The plan sets forth the treatment of claims against and interests in the debtor’s estate

• The plan may provide for the release of certain claims by and against Board members, company personnel, and certain debtor and non-debtor parties

• These provisions can be a powerful bargaining chip and ease concerns among constituents about potential liabilities arising from the chapter 11 process

• Once approved by the bankruptcy court at a confirmation hearing, a plan binds all parties-ininterest that received proper notice, even if those parties voted to reject the plan

• The plan discharges prepetition claims, including litigation, against the debtor, except to the extent that the plan expressly preserves such claims

• To avoid ERISA fiduciary claims from hamstringing the post-reorganization business, it is imperative such contingent liabilities are not preserved in the court approved reorganization plan

Tension Between ERISA and the Bankruptcy Code

• Generally, the ESOP and ESOP participants are treated as “equity holders” in bankruptcy, which makes them effectively last in line for getting paid for their stock in the Company that is being liquidated in bankruptcy

• Former ESOP participants in payment status have priority over active ESOP participants - In re Indian Jewelers Supply Co., the bankruptcy court held that several former employees of an ESOP-owned company were debt holders, and not equity holders, for bankruptcy purposes.

• Similarly in Merrimac, the bankruptcy court found that ESOP repurchase obligations were debt claims, rather than equity because of retirement and ERISA policy goals

• However, in spite of the nature of the ESOP’s status as only an equity holder, some banks and institutional lenders are uncomfortable lending to ESOP-owned companies, though research proves that ESOP-owned businesses are less likely to default and, if they do suffer a default, generate less losses for the lender

• Remedies for this concern include equity pledges from the ESOP/company (to prevent the ESOP from acting as the equity holder), proper review of the ESOP plan document to ensure proper protections (as allowed by ERISA) pertaining to benefit vesting and timing, etc.

Secret Word for CE

H & R Block

Conclusion

Diversity Equity Inclusion and Belonging: How Does it Connect to Ownership Culture?

Nelson Parrish II Senior Consultant

Heather

Stephens

Human Resources,

Manager

Praxis

Consulting Group

Employee Engagement

Restek

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

DEI Systems Change Model

Diversity, Equity, Inclusion and Belonging

Culture

Leadership

Strategy

Mission Impact

Employee Engagement & Ownership

Customer and Client Satisfaction

Growth & Sustainability

DEI Terms

“Diversity” determines who is in the room

“Inclusion” means everyone in the room is heard and feels valued

“Equity” ensures everyone in the room is given opportunities to grow and succeed

Graphic from: Krys Burnette, Belonging: A Conversation about Equity, Diversity, and Inclusion

What is Culture

The way a group of people get things done

Values, beliefs, and behaviors that can be lived and passed to new staff

The overarching visible and invisible glue that holds groups of people, organizations, and nations together

Othering

Who is in the circle of human concern?

The opposite of Othering is not “saming.”

Culture

Imagine you are talking to a someone about what it’s like to work at your organization.

What would you say?

What is the “inside story” about how things work?

In groups of 3 discuss your thoughts and the themes that emerge

Ownership & Belonging

Reflections/Questions

Where is your Board?

Where is your executive management team?

Does your Board have a DEI Committee?

Does your Board have an employee ownership committee?

What does your board need to learn?

Restek Corporate History

Founded in 1985

Humble beginnings in 1985, Restek starts out in a single room of an elementary school–turned business incubator making Fused Silica capillary columns

today – 140,000 ft2

Bellefonte, PA U.S.

The Restek Campus

Restek Corporate Headquarters

Restek: A Global Company

Research & Manufacturing:

Global Headquarters, Bellefonte, PA

Glastron, Vineland, NJ, U.S.

Microquartz, Munich, Germany

Sales Offices:

Global Headquarters, Bellefonte, PA

Restek Thames (London)

Restek France (Paris)

Restek GmbH (Frankfurt)

Restek Italy (Milan)

Restek Spain (Madrid)

Restek Japan (Tokyo)

Restek China (Beijing)

Restek Differentiation – The Foundation

Focused on the Customer 100% ESOP in 2008

Focused on Employees

Plus 1 Service – free, fast, friendly service – go the extra mile

Innovation – improved workflow solutions for chromatography

Execution – quality products and services on-time

A safe, healthy and energetic working environment

Since every Restek employee is also an owner, every one of us has a vested interest in our success.

What Restek does

Focus Markets

Market-based Solutions

Restek’s Employee Ownership Story

• First elective purchases 1998-2001

1998

• 2.1% employee owned

2001

• Pool of Restek shares available because of ESOP transactions

• Match of more than 3% of pay provided from 2001-2004 – grew to 9.5% employee owned

2004

• Began exploring how to move 100% ESOP ownership

• ESOP transaction provided a pool of shares to increase to 22.3%. Match increased to 6% of pay

2005

• From 2005-2008, Restek made contributions which released shares

• Match continued to be offered at 6% of pay

2008

• Leveraged 100% ESOP transaction made a pool of shares available for decades

• Match continued to be offered at 8% of pay or more

• Over the past 14 years, Restek stock value has grown exponentially by almost 1800%

2022

Our Journey

2020: Grass Roots Efforts & Focus Group Discussions about True North

2021: Introduced Employee Engagement as Strategic Focus

Q1 ‘22: Began conversations with Praxis about DEIB

July ‘22: Praxis delivered DEIB workshop with Leadership Team & Board of Directors

Sept ‘22: First ever global engagement survey; incorporated DEIB Questions & demographics

December ‘22- January ‘23: Partnered with Praxis to Conduct 8 focus groups

February ‘23: Presented long term multi-phased DEIB strategy to Board of Directors

Aligning DEIB & Our Ownership Culture

Shared Purpose & Core Values

Long-Term Focus

Incentives to Work Together

Employee Engagement

Improved Communication

Creativity & Innovation

Transparency & Accountability

Better Retention

Gathering Data: Putting our employee owners at the center

Our 2022 Global Engagement Survey provided in-depth data with breakdowns by manager, geography, and demographics

With our excellent participation (77%- 386 total employees), we also we gained over 2,759 comments across the company

~65 total employees volunteered for 8 different Focus Groups

Feedback also gathered by managers & supervisors from survey results sharing & action planning team meetings

Focus Groups

We held 8 different demographic Groups in December & January proctored by Praxis consultants.

Anyone

LGBTQ+

Group size ranged from 6-10 employees and were offered as a hybrid event held onsite in our training rooms with cameras/screens for participants joining virtually.

Third Shift

Remote Employees

Supervisors & Managers

Topics discussed included the Leadership Team (executive), Direct Mgrs/Supervisors, Career Growth, Compensation, Diversity, Inclusion & Belonging.

Women

White Men

What we found- Our Current State

Restek is at a crossroads on its growth journey and employees across the organization are feeling the tension of:

Who we were & what we did in the past

Who we have become and what we do now

Where we are going and what will need to change in the future

Recommendations for DEIB Strategy Focuses

Clearly Defining & Communicating Our Vision

Organizational Learning, Education & Development

Setting Clear Expectations

Company Commitments

Assessment & Evaluation

Defining the Vision: Gaining Alignment on our True North

• After much discussion, we recommended to our board that we keep the word ‘family’ because it is bolder

• We felt that it raised expectations for who we are and are striving to be.

• We discussed that it will be important to be specific as to Restek’s vision of why we aspire to be a family; making sure that it is tied back to our Core Values & employee ownership culture

RESTEK’S ‘NEW’ TRUE NORTH

Restek is a family of employee-owners committed to an inclusive, diverse, collaborative, and safe workplace dedicated to the success of our colleagues, customers, business partners and to supporting the local communities in which we operate.

Focus Group Feedback

• The term ‘community’ was about equal to ‘family’ as a preference in the revised True North statements, though some shared it could be a potentially negative association for some employees.

• Those who identified more strongly with the word family, did clarify that they felt that it was more in relation to their direct teams.

• The change from ‘employees’ to ‘employee-owners’ was well received.

Phased Multi-Year Approach

Phase 1: Foundational (2023-2025)

• Introduce our Vision and set the stage for Restek’s commitment to DEIB, starting with a focus on Inclusion & Belonging

• Provide foundational learning on key inclusion & belonging themes by role

• Review current policies, processes, and systems; prioritize for action

• Introduce basic concepts of Diversity & Equity

• Establish baseline metrics & accountability

• Develop internal communications strategy to support efforts

Phase 2: Integration (2026-2028)

• Regular DEIB trainings and workshops for leaders & staff

• Deepening of Diversity and Equity knowledge & practices

• Robust strategy and internal communication plan in place

• Revisions & updates to existing policies, processes or systems identified in Foundational phase

• Measure impact & change

Phase 3: Sustainability (2028 & beyond)

• DEIB efforts evolve & continuously improve

• Culture remains stable, diverse, and inclusive even with turnover, new hires, etc.

• Restek is a model that others can learn from within the ESOP community as well as our industry

• Employee engagement, morale, and belonging is high

Organizational Learning, Education, & Development

LT & HR Teams

Board of Directors

Managers & Supervisors

Employees

Foundational Knowledge & Skill Building Based on Role

Setting Clear Expectations

Focus on what behaviors drive inclusion and create clear ties to our ownership

We will define what True North means and use that to set expectations.

culture Leaders will be shown how to model these behaviors and equipped with knowledge to be successful in reinforcing

If someone is not living up to the expectations, what will we do?

Real examples given to employees to help them understand how this will be applied and what their responsibilities are to one another

Mutual Trust & Respect- employees should resolve it with the other employee

Employee has a conversation with a manager or HR for support

Manager talks to the employee and coaches on behavior

Follow progressive discipline if needed

Systemic Assessment & Evaluation

Partnership with key stakeholders across the business will help create buy-in and allow us to better influence change across the organization.

Policies, Processes, & Practices

Compensation & Benefits Talent Acquisition

Processes

Rewards & Recognition

Talent Development & Training

Opportunities

Promotions & Organizational Structure

Company Commitments

Our Core Values and True North should guide our way on our DEIB Journey.

Engage employees across the globe in DEIB activities

Recognize that our DEIB work is a journey, and we are at the beginning.

Diversity, Equity, Inclusion and Belonging is important to all of us.

As Restek’s leaders, we will own it and be accountable to the overall success.

Defining success and developing metrics to measure progress will be critical

An Ongoing Journey

Restek’s DEIB efforts will be a perpetual work in progress, as we are committing to an ongoing journey in which we never reach a destination, but will be guided by:

Our Vision: True North

Multi-Year Strategy (starting with Inclusion & Belonging)

Leadership Team Commitment

Core Strategic Focuses:

o Ongoing Education

o Clear Expectations

o Company Commitments

o Continuous Assessment & Evaluation

Employee Ownership Advantage

Significant

Not

Secret Word for CE

POP

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

From Mad Men to Mayberry –

Changing Culture in a Service Industry with Trust and Communication

Room Survey

Shameless Plug – Background Information

Historical Performance

Humble Beginnings

How would you announce that you are becoming an ESOP; and that your employees will benefit from the fantastic wealth building opportunities that equity presents?

Trust – It is the Foundation

It is not enough to tell people that you are trustworthy. You should have examples, and then build on them!

You Can Not Expect Your People to Be Honest if You Don’t Create a Culture That Promotes It

What does it mean to create a culture that promotes honesty?

Trust – You Have to be Available

If you are an officer, one of the most important things you can do is make your people feel heard and feel like they have a relationship with you.

The more available you are, the more comfortable your staff will be to share ideas.

You don’t have to say yes to all of them, some ideas will not make the cut.

When you have opportunities, do fun things that help your people know each other at a level beyond just surface-level work interactions.

Be transparent, it’s less to remember and people know when you are genuine. Get comfortable breaking the ice. It’s equally as important as that spreadsheet.

Trust – You Have to be Available

When we heard it takes 10 years to build a culture, we laughed, until we realized that we had a long way to go. Once we realized that we had people pulling against the rope, we made some difficult decisions after that.

Non-Negotiable Traits

Defining what you expect from your employees should be priority What do you value?

1. Humility

2. Honesty and trustworthiness

3. Great communication up and down the ladder

4. Commitment to lifelong learning

5. Think like an owner, because you are

Written Communications – ESOP Weekly

Everybody loves semi-weekly emails from accountants about financial numbers, right?

ESOP Weekly

•New people

– How to Make It Fun

• Future-looking company strategy

•Staff poll questions

•ESOP information

•Bonus Pool

•Hidden games

•Inspirational short stories that match your culture

•Funny memes, I should stress work appropriate

•Staff background interviews – assuming they want to share

•Interesting stories from history that have a resonating point

•Major wins

•Opportunity areas

•Oh yea, and the numbers, bonus points for bonus pools

ESOP Weekly – It’s Not Enough

Meet With Your Teams

• Meet with your teams

• Make it engaging

• Let them decide matters that will affect them most when you can

• Teach about ESOP and financial literacy, but stress what the benefit is to them.

• Leave time for questions

• Leave time to interface with them after the team meeting. Some questions people are afraid to ask

• Talk about plans for the future

• Talk about opportunity areas

• Let it be fun when it can be fun

If You Meet Outside of Working Hours, Make it Fun When You Can

ESOP Weekly – How to Make It Fun

• How many of think that your company would list communication as one of your top issues?

• How many of your companies have defined what expected communication looks like?

ESOP Weekly

– How to Make It Fun

• How long do you spend on communication expectations in your interviews?

ESOP Weekly –

How to Make It Fun

• To make your team better you have to communicate when they make a mistake or don’t live up to expectations. Failure to do so creates blind spots and stunts professional development.

• Obviously, there is a right way and a wrong way.

• Praise publicly, coach, and council privately.

• You should have a way to report positive feedback. wins@chillcoinc.com

That Goes for the Boss Too

• We host a C Level executive interview for every employee we hire.

• We tell every prospective hire that the expectation of both positive and negative feedback needs to flow up and down our organization.

• Bosses must put their egos aside to avoid blind spots and bad direction.

• Even if you tell them all, not everyone has the backbone to say something. Anonymous surveys are helpful as well.

Set Expectations for Coworker

Disagreements

• some disagreements between coworkers need to be elevated to management, but for common issues and problems, you should give guidance in the interview about how disagreements should be handled.

•Professionally discussing minor issues without elevation builds respect and better relationships.

Ideas are Free

•If your teams feel free and comfortable to communicate, you will be shocked at the ideas they share!

•Again, set your ego aside. Some ideas don’t be used, but feeling heard makes all the difference.

•Many will be used and be transformative. Successful ideas from line-level employee owners only encourage other great ideas! !

Try to Create Incentives That Encourage Whole Team Synergy and Long-Term Success

• This is why ESOPs are so great!

• Our bonus pool is companywide and based upon company success.

• Make sure long-term success is prioritized over quarterly success.

Secret Word for CE

Buck O'Neil

Integrate Leadership Development & Succession

Ginny Vanderslice Founding Principal Praxis Consulting Group

Carolyn N. Stanworth President and CEO BL Companies

Introductions

Ginny Vanderslice

• Cofounder of Praxis Consulting

• 30+ years working with ESOP companies

• Focus on Ownership Culture, Leadership Development & Succession

• Creator & Academic Director of Executive Leadership Program for ESOP CEOs at University of Pennsylvania; Sponsored by The ESOP Association

• Co-author of Leadership Development and Succession Planning article in a recent NCEO publication (available at the NCEO table)

Carolyn Stanworth

• President and CEO of BL Companies since 2010

• Primary driver responsible for planning and instituting the ESOP at BL Companies

• Champions the multi-year Leadership Development initiative and succession planning efforts

• Works with senior leaders, managers, and external consultants in the implementation and enhancement of the shared ownership culture at BL Companies

Agenda

Some background

BL’s integration of LD and Succession

Principles of integrating these initiatives

Q&A

Internal vs External Leaders

• New Perspectives

• Un-tried, no history

• Known entity

• Lack CEO experience

• Experience not available inside

• Values/ style risk

• Career path; professional growth

• Internal competition/ potential politics

• Generate excitement

• Culture risk; unaware of politics

• Continuity: know company, business, culture & stakeholders

• Challenge re peers

• Easier to make hard changes; not tied to history

• Fail more often

• Know any potential landmines

• Know about gaps; need development

What if No One is Prepared?

Why Integrate These Initiatives?

Both are core to a strong Ownership Culture

• Employee owners want professional development opportunities

• Mitigates risk if someone leaves; increases leadership capacity overall Culture sustainability; Business continuity

• Know the value of the culture

• Have the skills to support the culture

Succession System Leadership Development

Leadership Development & Succession Systems

Steadily increasing overall leadership capacity

Preparing for company growth

Lower Risk

Ongoing risk mitigation for all key positions

Leadership Develop Program

Competencies: Skills & Knowledge

Executive Planning Aligning

Leader

Manager

Supervisor

Engagement

Delegation

Accountability

Team building

Individual contributor

Listening Feedback Conflict

Power Dynamics

Decision Making

Coaching

Strategic Thinking

Systems View

Leading Change

Leadership Development

Programs can be designed for & integrated across all levels

• Interconnected content, linked to culture

• Common language and foundational skills consistent with culture

• With increasing responsibility:

» Deeper self-understanding

» Increase skill complexity & mastery

» Broaden focus

» More difficult challenge assignments

Introduction to BL Companies

Professional Services Firm

Architecture

Engineering

Environmental

Land Surveying

380+ Employees in 16 Offices in 11 States

• CT, NY, MD, PA, OH, MA, NC, NJ, RI, TX, FL

100% Employee Owned - ESOP in 2006

38 Years in Business

Why Leadership Development & Succession?

• Stronger team and leadership bench

• Wanted to change our culture

» More professional; more systematic

» Learning organization, more responsibility and accountability

• Competitive Advantage

» Attract and retain best talent

» Increase candidate pool for crucial roles

• Provide skills for all employee owners to be engaged in leadership

• Intentional about succession for long term sustainability

Just Get Started…

BL Core Values

Accountability Competency

BL Leadership Development Programs

Leadership Skills Support Succession

Leadership Development Essentials and Advanced Program provide skills that support the Succession process.

1. Strategic Thinking

2. Assessing Performance / Potential

3. Developing the Ideal Team

4. Leader as Coach

5. Culture

6. Feedback

7. Systems Thinking

Succession System: Process Steps

Succession Planning is a core job responsibility

1. Identify Future Organization / Key Roles

2. Define Competencies and Strategies

3. Identify Candidates

4. Assess Candidates and Readiness

5. Develop Candidates

6. Monitor Progress

7. Repeat (create routine)

Future Organization / Key Roles

Key Roles and Candidate Assessment

Key Roles

• Strategic Importance, Specific Role Responsibilities

• Strategy for Succession (e.g., internal, external, etc.)

• Candidates

Assess Candidates

• Leadership Competencies

• Current Functions

• Future Functions

Monitor and Report

Just Stay With It…

Leadership Development: Worth the Investment?

40% of Employee Owners are participating in committees or teams that drive critical business decisions and processes.

Substantial multi-year investment in all Employee Owners for training and ongoing learning.

Keep in Mind

• Understand the value of your investment

• Start anywhere

• Build a consistent language

• Define additional skills/knowledge needed at each level

• Set clear expectations that all managers develop potential successors

• Integrate skills into all talent management processes

• CEO/President must actively champion

Secret word Roanoke Road

Integrate Leadership Development & Succession

Ginny Vanderslice

Founding Principal Praxis Consulting Group

Ginny@praxiscg.com

Carolyn N. Stanworth

President and CEO

BL Companies

Carolyn@blcompanies.com

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Framing the Governance Issue

• Acquisition topic is realistically unavoidable

• Key facet of strategic plan

• May have a Chief Growth Officer or directed executive role

• Company maintains a target acquisition list or is actively engaged with a buy-side broker

Framing the Conversation

• Executive may be tasked with outbound solicitation of acquisition targets

• Expectation is periodic feedback and discussion with the Board

• But what about when the roles are reversed?

• Does the Board and Executive have a framework for discussing inbound solicitation interest?

•

“Would you be interested in selling?”

• “Is the Company for sale?”

Framing the Conversation

• Who needs to know if inbound solicitation is received?

• May not be everyone depending on party and level of interest

• It’s important to discuss or have a framework of how to elevate the conversation

Framing the Conversation

• Need to consider:

• Basis for decision making

• Wasting time

• Creating distraction

• Cost associated with diligence

• Reputational / Client Vendor Risk

• Legal / fiduciary duties of role

Framework for the Board

• Duty of Care (State Law)

• Informed, decisions based on material information available, critical assessment, engagement of advisors where necessary

• Duty of Loyalty (State Law)

• Act in good faith in the best interest of the corporation. Refrain from conduct that could injure the corporation or place personal interest higher, including self-dealing

• Duty of Prudence (State Law)

• Act with skill, care, prudence and diligence under the thenprevailing circumstances

Framework for the Board

• Board Composition

• Internal vs. External Board Members

• Doesn’t change required duties

• Can help mitigate real / perceived conflicts

Framework for the Board

• Protected by the “Business Judgment Rule”

• Applied by courts in analyzing directors’ actions

• In a breach of duty of care claim, director is insulated from liability for the consequences of a business judgment if director acted in good faith and with the best interests of the company in mind

• If the business judgment rule applies, courts will look at decision-making process, not the final decision

Polling Question #1

True or False

Only External Board members are required to follow the Duties of Care, Loyalty and Prudence.

Framework for the Executive

Duty as an officer of the Company •

Duty as a Board Member (if applicable)

Obligations of as executive team member (non-officer)

Awareness of participation in industry peer groups and one-on-one meetings

From Solicitation to Sale

• Circumstances Driving the Sale of an ESOP Company

• Unsolicited offer

• Non-ESOP majority shareholder

• Market conditions and industry dynamics

• Company-specific issues

What Constitutes an Offer

• Types of Solicitations / Offers

• Inquiry • Indication of Interest

• Letter of Intent

• Definitive Agreement • Each type of solicitation / offer deserves a certain level of response

What Constitutes a Bona Fide Offer

There is no black letter law as to what makes an offer bona fide, but it often has some, or all, of the following:

Proposed consideration is nominally adequate; Other proposed deal terms are fair and reasonable and treat all shareholders equitably;

Potential buyer has the financial ability to pay the proposed purchase price;

Potential buyer has a track record of completing transaction and has a valid strategic intent;

Potential buyer has completed sufficient diligence;

Potential buyer’s transaction team is knowledgeable and rebuttable; and

The closing of the proposed offer is based on conditions preceding and / or subject to requirements that are customary.

Response to the Offer

• What is the Board / Executives’ Plan for reviewing and responding?

• Practical tips for reviewing

• Fishing expeditions

• Confidentiality

• Sharing information

• When is there no requirement to respond?

• Does the Board have formal policy of how to respond?

• When is the Trustee notified?

Polling Question #2

True or False

The Company must inform the Trustee of all offers they receive from prospective buyers.

Considerations for Remaining Independent

• By-Laws & Articles of Incorporation

• B-Corporation

• State of Incorporation

• Following the Policy

• What are the requirements?

• Parameter for diligence and / or running a process?

• Do you share this with the Trustee?

• Can you suspend the policy?

• How restrictive can the policy be?

Polling Question #3

Multiple Choice

Who is responsible for evaluating an unsolicited offer?

2. CEO

3. Board of Directors

1. Trustee

Trustee Perspective

• How has the Board satisfied its duties?

• Identify conflicts and address if present

• Follow Board policies (if any) on handling of unsolicited offers

• Avoid jumping to a conclusion / decision (acting in haste)

• How available options and information were considered and documentation for reasons and analysis

• Communication

Secret Word for CE

Moving from Employee Performance Reviews to SAFE Check-Ins

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Radian Research became a 100% ESOP in 2008.

Overview of Radian Research, Inc.

110 employees with 2 facilities: Lafayette, IN & Pearl, MS

We design and manufacture products to test the accuracy of electricity meters and we develop software products to manage electricity meter test data. Our main customers are electric utility companies around the world.

Moving Beyond Annual Performance Reviews …

Employee Owners Performance Evaluation Self-Managed Team

Janet Jones - Accounting

Meredith Peterson – Customer Support

Jamie Nolan - Engineering

Kim Chaney – Production

Elaine Wilson - Production

Pedro Ramirez - Marketing

Tom Eddleman - Engineering

Roquelle Fogarasi – Admin - Team Lead

Renée Mundell - Coach

SMT Considerations:

• Concerning Issues regarding Annual Performance Reviews:

 Too time consuming.

 Too infrequent

 Too manager driven. “Feels like going to the principal’s office.

• Objectives for new process:

 Timely & Relevant

 Safe to showcase talent and own mistakes

 Empowering employees to own performance and growth

The SMT defined their own objective:

To create a safe, supportive Employee Owner evaluation process, wherein the Employee Owner experiences satisfaction in the demonstration of accountability, and with support of their manager implements self-initiated, continuous improvement output to enhance performance by shifting the emphasis from past performance to what does an Employee Owner need to contribute in a manner which exceeds expectations that delivers above and beyond.

The SMT's Motto:

Empowering Employee Owners to own their growth and success

The New Process

Self Assessment For Employee Owners

The New Process

Moving the performance evaluation to a regularly scheduled twoway discussion allowing for greater flexibility and responsiveness to the need of the Employee Owner and the business.

3 SAFE Check-Ins

April: Check-in 1

September: Check-in 2

February: Check-in 3

Purpose of the Self-Assessment for Employee Owners (SAFE) Check-Ins

1. Check-ins are a “safe place” to own mistakes, share thoughts and concerns.

2. Check-ins are to support Employee Owners in doing their best work.

3. Check-ins are to foster communication and feedback.

4. Check-ins are to improve Manager/Employee Owner relationship.

Score Card

(A public document showcasing a team’s talent related to its productivity) The purpose of the Score Card is to provide transparent, objective performance information in relation to relevant goals. The Employee Owners, with manager guidance, of each Department/SubDepartment/Team will create a transparent, visible Score Card.

SAFE Check-In 1

April: a. Employee Owner discusses with manager Score Card performance over four (4) months. Employee Owner provides:

i. what he/she is proud of regarding his/her contribution to RADIAN.

ii. what he/she wants to improve on this year.

iii. how can his/her manager help.

April:

b. Employee Owner reviews Key Responsibilities and outlines Objectives for the current year, which align with top level company Goals, manager approves, with revisions, as applicable.

i. Topics:

1. Review Objectives from the previous year.

2. Set Objectives for the current year.

3. Key Responsibilities.

September:

a. Employee Owner discusses with manager Score Card performance over four (4) months. Employee Owner provides:

i. what he/she is proud of regarding his/her contribution to RADIAN.

ii. what he/she wants to improve on this year.

iii. how can his/her manager help.

b. Career Check-in

SAFE Check-In 2 Career Development

SAFE Check-in 2 is a way to get to know the employee and what they do and do not enjoy doing.

1. Are you doing what you want to be doing?

2. Where do you want to go and how can I or RADIAN help you?

3. Are you happy as a RADIAN Employee Owner?

4. On a scale of 1 to 10 (1 being not likely and 10 highly likely), how likely are you to recommend RADIAN to a close friend?

SAFE Check-In 3

February:

a. Employee Owner discusses with manager Score Card performance over four (4) months. Employee Owner provides:

i. what he/she is proud of regarding his/her contribution to RADIAN.

ii. what he/she wants to improve on this year.

iii. how can his/her manager help.

b. Peer review– Employee Owner provides thoughts and ideas on continuous improvement initiatives for the Employee Owner to take based on feedback from a two (2) Question peer review.

Peer Review

An Informal request for peers of the Employee Owner (peers can include direct teammates, Employee Owners in other departments, etc.) to answer two (2) questions pertaining to the Employee Owner.

There should be at least two (2) peers chosen by the Employee Owner, and at least one (1) chosen by the manager, 3 to 8 peers in total, to answer two (2) questions:

1. What should I continue doing?

2. What can I do differently?

Training – SAFE Process

Managers: Moving from Boss to COACH

C - Communicate with Empathy

• Listening Skills

O - Optimize Feedback

• Learning to optimize feedback for growth.

A - Access Employee Owner Strengths

• Identify and develop individual strengths.

C – Create a Plan

• Assist employees in creating a growth plan.

H - Hold Accountable

• Moving from Boss to Partner for Growth

Employees: Moving from Principal’s office to owning growth.

 Employee Driven

 Employee owns initiating and scheduling the discussion

 Employee owns needs and results

 Employee creates improvement plans

 Employee owns growth and success

Overall Training Objectives

1. Improve two-way communication

a. Equip Employee Owners with understanding and skills to make the most of twoway discussions allowing for greater flexibility and responsiveness to the needs of the Employee Owner and the business.

2. Help employees demonstrate accountability for personal growth

a. Fosters the RADIAN Culture of Continuous Improvement.

3. Understand what employees need from their manager to improve performance

4. Track output to improve performance

5. Increase Employee Owner Satisfaction

RADIAN Employee Owner Feedback

 Has helped to created a clear alignment between what I do and the corporate goals.

 Very grateful to have been included in the implementation and continuous improvement of the process – like adding the Top Level Corporate Objectives to the form.

 Pleasantly surprised the process did take less time with greater impact.

 Helped me identify for myself my career objectives and how to create the path to get there.

Russell Stover Secret Word

Moving from Employee Performance Reviews to SAFE

Check-Ins

Tim Everidge

President & CEO​

Radian Research, Inc​

Lafayette, IN

everidge@radianresearch.com

Renée Mundell

Manager – Customer Service & Support

Team Lead – RADIAN ESOP Ambassador Team​

Radian Research, Inc​ Lafayette, IN

rmundell@radianresearch.com

Not Just ESOPs: Different Paths to Employee Ownership

Greg Weiss, MBA, CPA/CFF, CVA

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Who’s in the Room Today?

Who is attending their first NCEO conference?

•

Who is an owner of company?

Who is an employee of a company? •

•

Who is an employee-owner of a Company?

Why type of employee ownership mechanisms does your company have?

Who Am I?

• Nontraditional path to becoming a CPA

• Exposure to open-book management

• Exposure to employee ownership

• Falling into a career in employee ownership

• Giving back to the cause

Why Are We Here?

• Learn about the continuum of employee ownership

• Know the advantages and disadvantages of each form of employee ownership

• Understand how some forms of employee ownership can be used to ease into employee ownership and how some can be combined to meet everyone’s long-term and short-term goals

History of Employee Ownership

1773 - Benjamin Franklin’s print shops

• Sent journeyman employees to cities to set up print shops

• Franklin paid the up-front costs and 1/3 of the expenses

• Took 1/3 of the profits for six years

• Journeymen could purchase the equipment from Franklin with their share of the profits

History of Employee Ownership

1792 – American cod industry

• Washington, Jefferson, and Hamilton all agreed on one of the American government’s earliest legislative actions: Providing a tax break to help rebuild the New England cod fishing industry.

• Assistance only given to shipowners with a written profitsharing contract

• 3/8ths to the owner; 5/8ths to the crew

History of Employee Ownership

History of Employee Ownership

1887 – Proctor & Gamble

• William Proctor’s grandson began a profit-sharing program

• By giving employees a stake in the company, they were less likely to go on strike

History of Employee Ownership

1916 – Sears Roebuck Company

• Funded its pension plan primarily with company stock

• Provided good retirement benefits

• Excellent way to motivate employees

History of Employee Ownership

1940s – Louis Kelso

• Shared with the world his concepts for distributing capital more equally

• Believed that without broader ownership of significant amounts of capital, “many economic and social problems will prove intractable, making the expansion of government’s role in the economy, and perhaps socialism, increasingly unavoidable.”

History of Employee Ownership

1974-1986 – Louis Kelso and Senator Russell B. Long (D-LA)

• Passed 17 laws encouraging employee ownership

• Including the ESOP provisions of ERISA

Start with Why

Business owner

Company/employer

Employee

Ownership Culture

Employees think and act like owners

• Teach people how the company makes money

• Share performance data

• Train people in business literacy

• Build employee involvement

Ownership Culture

Cost: ↓ Low

Governance: No change

Complexity: ↓ Low

Goals: Long-term

Regulation: ↓ Low

Rewards: N/A

Ownership Culture

Advantages:

• Employees feel and act like owners

Disadvantages:

• No actual ownership

• No government regulation

• Scalable

• Improves company performance & job satisfaction

• Takes a significant time and commitment from management

• No direct financial rewards

• May be seen as a gimmick

Bonus Plan

Bonuses are a payment or incentivized reward added to an employee’s compensation package. Companies use bonuses to increase productivity, improve retention, thank employees for their efforts, and create a positive work environment.

• Discretionary bonuses are determined at our company’s sole discretion.

• Nondiscretionary bonuses are promised to employees and guaranteed to those who meet established criteria.

Bonus Plan

Cost: ↓ Low

Governance: No change

Complexity: ↕ Medium

Goals: Short-term

Regulation: ↓ Low

Rewards: Immediate

Bonus Plan

Advantages:

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership

• Little regulation

• Easy to implement

• Easy to understand

• May produce conflicting financial results

• Unintended consequences

• No long-term incentive

Performance Awards

Performance awards are designed to pay out (in cash or stock) for performance over a few to several years, rather than annually.

Based on long-term improvements in: • Sales

Quality

Performance Awards

Cost: ↓ Low

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↓ Low

Rewards: Delayed

Performance Awards

Advantages:

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership

• Little regulation

• Easy to implement

• East to understand

• Focuses on long-term goals

• May produce conflicting results

• Unintended

consequences

• Multi-year commitment

Profit Sharing Plan

Profit sharing are a qualified retirement plan funded with a portion of the company’s profits.

• In profit sharing plans, the company contributes a part of its profits into a pool of funds to be distributed among eligible employees.

• Profit sharing plans are qualified retirement plans that may be offered in lieu of or in addition to traditional retirement plan, like a 401(k) plan.

Profit Sharing Plan

Cost: ↓ Low

Governance: No change

Complexity: ↕ Medium

Goals: Short-term

Regulation: ↕ Medium

Rewards: Delayed

Profit Sharing Plan

Advantages:

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership

• Highly regulated

• Easy to implement

• East to understand

• No long-term incentive

• Can be opaque

Synthetic Ownership

Stock Appreciation Rights (SARs)

Restricted Stock Units

Phantom stock

Stock Appreciation Rights

Stock appreciation rights provide a right to the monetary equivalent of the increase in the value of a specified number or shares over a specified period of time.

• Usually paid out in cash

• Can be paid in shares (usually called a “stock-settled stock appreciation right”)

Stock Appreciation Rights

Cost: ↕ Medium

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Delayed

Stock Appreciation Rights

Advantages:

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership

• Can be difficult for employees to understand

• Equity-like experience

• No tax benefits to employees or employer

Restricted Stock Units

Restricted stock units are similar to a phantom stock (discussed next). Employees are given a restricted right to receive a payout of shares at a future date or subject to a performance condition.

Restricted Stock Units

Cost: ↕ Medium

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Delayed

Restricted Stock Units

Advantages:

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership until settled

• Rarely receive dividends or carry other stock rights

• Equity-like experience

• Subject to deferred compensation tax rules

Phantom Stock

Phantom stock is a reward paid to an individual for the value of a defined number of shares.

• The reward is not actually made in shares but in a promise to pay the employee the value of the shares at some point in the future.

• The reward is usually paid in cash but could be paid in shares.

Phantom Stock

Cost: ↕ Medium

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Delayed

Phantom Stock

Advantages:

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership

• Can be difficult to explain to employees

• Equity-like experience

• No tax benefits to employees or employer

Beneficial Ownership

• Employee Stock Ownership Plan (ESOP)

• Employee Ownership Trust (EOT)

Employee Stock Ownership Plan

An Employee Stock Ownership Plans (ESOP) is a defined contribution plan under ERISA.

• Funded entirely by employer contributions

• Invests primarily in employer stock

• The only retirement plan allowed to incur debt

Employee Stock Ownership Plan

Cost: ↑ High

Governance: Vote on some issues

Complexity: ↑ High

Goals: Long-term

Regulation: ↑ High

Rewards: Delayed

Employee Stock Ownership Plan

Advantages:

• Significant tax advantages

• Provides significant retirement benefits

• Employees share in the results of their efforts

Disadvantages:

• Regulated by the DOL and IRS

• Expensive to setup and maintain

• The ESOP Trust is a single shareholder

• No immediate cash reward for employees

Employee Ownership Trusts

An employee ownership trust (EOT) is a form of employee ownership that is relatively new in the United States. To become an EOT company, the current owner creates a trust that will own some or all the business.

• No legal definition separates an EOT from similar trusts

• The purpose should include the well-being of the company’s employees

• The trust may include other purposes

• Often includes profit sharing pool for employees

Employee Ownership Trust

Cost: ↓ Low

Governance: Based on Trust doc.

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↓ Low

Rewards: N/A

Employee Ownership Trusts

Advantages:

• Preserves the character of the business

Disadvantages:

• Relatively new in the US

• More flexible than other forms of employee ownership

• No tax advantages to selling owner or company

Actual Ownership

• Employee stock options

• Employee Stock Purchase Plans (ESPPs) • Restricted Stock • Worker cooperatives

Employee stock Options

The company gives options on the company’s stock. These options are in the form of regular call options that give the employee the right to buy the company's stock at a specified price for a finite period of time.

• Qualified Options are granted to key employees and top management and receive capital gains tax treatment.

• Non-qualified Options are granted to employees at all levels of a company, board members, and consultants and receive ordinary income tax treatment.

Employee Stock Options

Cost: ↕ Medium

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Delayed

Employee Stock Options

Advantages:

• Some tax advantages

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• No actual ownership until exercised

• No immediate cash reward for employees

• Dilutive on exercise

Employee Stock Purchase Plans

In an employee stock purchase plan, employees can purchase shares with their own funds, either at market or at a discount.

• In some cases, employers provide below-market or nonrecourse loans to help employees purchase the shares

• Employee hold shares as individuals with the same rights as other holders of the same class of security

Employee Stock Purchase Plan

Cost: ↓ Low

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Delayed

Employee Stock Purchase Plan

Advantages:

• Actual ownership

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• No immediate cash reward for employees

• Employees could feel pressure to invest

• Brings new capital into the company

• Market for sale of shares may not exist

Restricted Stock

In restricted stock plans, employees would be given shares or the right to buy shares (perhaps at a discount), but could not take possession of them until some time later when certain requirements have been met, such as working for a certain number of years or reaching a certain size.

• Restricted stock can be dividend eligible

• Restricted stock can be allowed to vote

Employee Stock Purchase Plan

Cost: ↓ Low

Governance: No change

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↕ Medium

Rewards: Mostly delayed

Employee Stock Purchase Plan

Advantages:

• Actual ownership

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• Restrictions may make benefit unlikely

• Market for sale of shares may not exist

• Unlike options, retains some value, even if stock price drops

Worker Cooperative

Worker cooperatives are business entities that are owned and controlled by their members, the people who work in them.

• Worker-members invest in and own the business together, and it distributes surplus to them

• Decision-making is democratic, adhering to the general principle of one member-one vote

Worker Cooperative

Cost: ↕ Medium

Governance: Democratic

Complexity: ↕ Medium

Goals: Long-term

Regulation: ↑ High

Rewards: Immediate

Worker Cooperative

Advantages:

• Actual ownership

• Focuses on long-term goals

• Employees share in the results of their efforts

Disadvantages:

• Dependent on state law

• Can be difficult to finance

• Change to democratic management can be difficult

• Dividends allocated to members are not taxed

Secret Word

Belvidere Park

Resources

Organizations: National Center for Employee Ownership (NCEO)

nceo.org

The ESOP Association

esopassociation.org

Democracy at Work Institute institute.coop

Resources

Questions?

Thank you for coming!

Greg Weiss, MBA, CPA/CFF, CVA

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Learning Objectives

At the end of the session, you will be able to:

• Understand the difference between ESOP distribution policies

• Identify what steps the company can take to manage employee benefit levels

• Learn how different debt structures can impact the company’s short-term and long-term cash flow

• Basic Transaction Financing Structure

• Controlling cash flow in the short term

• Synching Up long-term and short-term

• ESOP plan design impact on long-term cash flow

• What determines benefit level and how does it impact future cash flows?

• Future flexibility

Basic Transaction Financing

• Breaking down the capital stack:

• Senior Debt:

• Mix of asset based, cash flow or second lien loans

• Lowest cost financing alternative

• Typically, 2-3X EBITDA

• Mezzanine:

• Subordinated, generally unsecured

• Typically, Interest-Only Payments

• Possibly another 1-1.5X EBITDA

• Seller Notes:

• Subordinated, generally unsecured

• Fund remainder of purchase price

• May also include warrants on top of coupon rate

Basic Transaction Financing

Term Loan(s)

• Typically, a 5-year term; although stronger credits with collateral may seek a 7to 10-year amortization schedule

• Collateral shortfalls expected; can mitigate with cash flow recapture

• For companies on the lower end of the EBITDA range for an ESOP (<$2 Million of EBITDA), personal guarantees or pledge of proceeds may be required to mitigate the risk of the collateral shortfall, industry or customer concentration, etc.

• Subordination of remaining notes to fill out the debt stack with interest payments allowed with covenant compliance

• Loan Covenants Include: Senior Debt/EBITDA, Total Debt/EBITDA with the greatest focus on Fixed Charge Coverage Ratio/Debt Service Coverage Ratio

Controlling Cash Flow in the Short Term

Controlling Cash Flow in the Short Term

Fixed Interest Rate vs. Interest Rate Swap:

• What is an Interest Rate Swap?

• An agreement between two parties to exchange one stream of interest payments for another, over a set period of time. The most common and most liquid exchange fixed-rate payments for floating-rate payments

• An interest rate swap can give both parties what they want, but are they for everyone?

Controlling Cash Flow in the Short Term

Fixed Interest Rate

Pros:

- Simple

- Easy to Budget

- Smooths cash flow

Fixed Interest Rate

Cons:

- Likely higher than floating rate

- Prepayment Restrictions

Interest Rate Swap

Pros:

- Provides company with fixed rate and bank with floating rate

- Easy to budget

Interest Rate Swap

Cons:

- Can be complex

- Prepayment

Restrictions

- Termination fee if rates decrease

Variables That Can Impact Cash Flow

• What is your net EBITDA?

• Annual CapEx Requirements

• Existing Debt

• “Levers” to pull to help cash flow

• Loan Amortization (Downside?)

• Seller Note Interest; Cash and Paid In Kind

• Future Plans outside of ESOP

• Acquisition Targets

Synching Up the Short-Term and Long-Term Debt

ESOP Plan Design Considerations

IRS contribution limits

Corporate tax deductions

Allocation formulas

Distribution policy

Internal ESOP Loan

Term of loan impacts future cash flows:

• How many years should the loan be?

• Loan amortization – required annual payments

• How quickly shares are allocated

• IRS limits on contributions

• How many shares will need to be repurchased and when

• S distributions/dividends needed

Internal ESOP Loan

Required annual principal and interest

• IRS limits contributions to 25% of eligible compensation

• Will required annual contributions exceed IRS limit?

• What about future contributions to repurchase shares?

• S distributions to fund excess over IRS limits and impact

• Is company trying to maximize corporate tax deductions?

Internal ESOP Loan

Transaction structures impacting internal loan terms:

• Direct sale to ESOP

• Redemption followed by sale to the ESOP

• Partial redemption and sale of rest to ESOP

• Redemption followed by contribution of shares to ESOP

Internal ESOP Loan

Project Benefit Level

• Length of loan determines level of benefit

• Shares released and allocated over term of the loan

• Benefit level determined by the value of shares released and allocated annually (share value x number of shares allocated)

• Benefit level also includes:

• Contributions to other plans and/or to ESOP not used for loan

• Forfeitures

• Contributions to repurchase shares

Benefit Level vs. Contribution

Contribution % equals amount contributed/eligible compensation

Benefit level equals value added to account/eligible compensation

Value of shares released from contributions may be

or > contribution amount

Benefit Level vs. Contribution %

Repurchase Obligation

• The faster shares are allocated the sooner they must be repurchased

• Once allocated – subject to distribution rules

• What is the right distribution policy

• Can it be changed?

• What is strategy for repurchased shares?

• Redeem

• Recycle

• Can change over time

Repurchase Liability in Dollars

Other Plan Design Considerations

Future Flexibility

What things can be changed after the ESOP is established?

• Eligibility – make less restrictive

• Pay down internal loan faster

• Distribution policy

• Share repurchase strategy • Other

Planning is the Key to Success

• Model out/project potential impacts of plan design

• Compare alternatives

• Stress test assumptions

• Share price growth

• Growth in workforce

• Alternative distribution policies

• Make sure results align with myriad objectives

• Cash flow, tax deductions, benefit level, employee ownership

Secret Word for CE

Walt Disney

Planning for Success Questions?

Important Information

The Presenters gather their data from sources they consider reliable; however, they do not guarantee the accuracy or completeness of the information provided within this presentation. The material presented reflects information known to the Presenters at the time this presentation was written, and this information is subject to change. The Presenters make no representations or warranties, expressed or implied, regarding the accuracy of this material. The views expressed in this material accurately reflect the personal views of the authors and do not necessarily coincide with those of their employers.

The Presenters do not provide accounting, tax or legal advice. The information and material presented herein is provided for educational and informational purposes only and is not intended to constitute accounting, tax or legal advice or to substitute for obtaining accounting, tax or legal advice from an attorney or licensed CPA.

2798570-032023

Jamie Walrack and First American Bank are not affiliated with any company of the Principal Financial Group®.

Recruiting and Retaining Employee Owners

Patty Munger

Nataliya

Boychenko Stone

Molly Mead

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

Session Goals

• Learn practical strategies for recruiting employee owners

• Learn practical strategies for retaining employee owners

• Hear your strategies for recruiting and retaining employee owners

Employee Turnover

• In small amounts, turnover keeps the organization fresh with new talent and ideas

• When churn rates for employees are high, businesses spend time and money training new hires while losing out on potential new clients and revenue

• Employee turnover costs can equal up to one-third of the employee’s annual salary

• Three out of four employee resignations can be prevented

• Company turnover can be reduced by 29% to 59 if employees are aligned and engaged

The Talent Shortage

Unemployment in the United States

• The national unemployment rate is at 3.4%, the lowest it has been in 60 years despite the prominent stories about layoffs in high tech

• The same is true for all 4 regions of the country

• This means you have to outperform the competition

Are you using the fact that you are an ESOP in recruiting and retaining?

Radian Research Value Proposition

Join a world leader in energy measurement and start your ownership journey today!

Radian Research is an employee-owned innovative technology company with an engaging and participative work environment. The focus of Radian is our customer, and the heart of Radian is our team. We recognize and value the 3 Cs of Radian’s culture: Customer-centric focus, continuous improvement mindset, and care for our Customer, company, community, and for each other.

Resignation Regret

26 % of workers who resigned from a company regret that decision

They might have left for more $ or more flexibility.

Motivation research tells us that once you have “enough” money to meet your needs, more money is not a motivator

Stay Conversations

If you know what motivates them to leave/stay, you might be able to do something about it

Use a series of stay conversations to find out and revisit often

Exit interviews occur too late

Healthcare affordability

The Shifting Employee Benefits Strategy

Pandemic, Societal Unrest, Inflation, and the Great Resignation Collide

Poor mental health and substance misuse at record high levels

DEI and SDOH, and health disparities come into focus Work/Life balance

Expanded life stage support

(Reproductive/Leave/ Caregiver)

Tight labor market heightens need for robust employee benefits offering

Continued health deterioration and delayed care

Inclusive benefits and perks

Employee Benefits Strategies in 2023

• Implement more virtual health opportunities (such as mental health, physical therapy, digital coaching and condition management), 54%

• Expand access to mental health services, 47%

• Implement initiatives to reduce health inequities within health plans, 24%

• Expand centers of excellence to include additional conditions (such as cancer and infertility), 22%

• More-focused strategy on high-cost claims, 22%

• Implement high-performance networks, 16%

• Eliminate out-of-network coverage for select services, 6%

• Consolidate/reduce number of virtual health solutions offered, 5%

4-29-2022 Survey Result: Recruitment Strategies

• Indeed, JAzzHR, LinkedIn, texting services, Facebook, peer Recruits

• Retention bonus, wage increases

• Employee referral bonus, sign-on bonus, stay bonus

• Quarterly profit sharing

• ESOP

• Increased culture, manager and employee training

• Career fairs, summer interns

• Stay interviews

• Updated marketing

• Total compensation package, competitive benefits (free health insurance), cafeteria plan

• Flexible work from home hours

• Improved communication

• Increased PTO time, moving to responsible time off

How do you feel about the benefits your company offers?

ⓘ Start presenting to display the poll results on this slide.

4-29-2022 Survey Result: Enhanced benefits

• Wage increase, retention bonus, productivity bonus, Christmas bonus

• Parental and maternity leave

• Caregiver leave

• Commuter benefit

• Enhanced time off including sick leave

• Enhanced dental and vision coverages

• Whole life insurance

• Pet insurance

• Flexible reimbursement account

• HSA

• Flexible work policy

• EAP

• Home office equipment

• Relaxed dress code

Are you using the fact that you are an ESOP in recruiting and retaining?

Incorporated into our Employer Brand & Company Culture

Job Advertisements

Screening conversations

Interviews

Job Offers with

Illustration of Total Rewards

Leadership Meetings with Break Out Sessions to share ideas

Communication

Our Values

Collaboration & Respect

Transparency of Business

Objectives and Results

Talent Acquisition & Recruiting – Two Sides of the Same Coin

Create a Talent Acquisition Strategy to acquire employees for long term success

Develop an effective Recruitment Strategy to fill positions quickly

Having the right people lined up to fit open positions now & in the future

Getting People Onboard, On Time!

Longer View/Vision

Prepares the Foundation

Short Term Goals

Fill the position

Build Your Talent Pipeline

1. Get serious about your Company Branding; showcase your ESOP culture

2. Appeal to the right audience; use the right words; “Hunt” for the right candidate

3. Research & invest in helpful external services

What’s your Talent Acquisition Budget?

Recruiting Strategy

Selling the Company & The Opportunities

Continuously assess your current process, find gaps & make improvements

Develop your Key Performance Indicators & Create Metrics that Matter

Nurture Candidates with your Internal Process

Interview Training

Retention Strategy

Total Rewards

• Strong Leadership

• Frequent Feedback

• Good Work/Life Balance

• Opportunities

• Competitive Pay Packages

Growth Opportunities

Great Work Environment

Strong Onboarding Strategy

Our Culture, Aligned with Our Mission, Vision & Values

Rewards & Recognition Program

Employee Engagement

Secret Word Amelia Earhart

WHAT ARE YOU DOING?

Synthetic Equity Uses in ESOPs and Executive Compensation

Peter Aliferis Managing Director Pendo Advisors, LLC

peter.aliferis@pendoadvisors.com

Brian Hector Partner

Morgan, Lewis & Bockius LLP brian.hector@morganlewis.com

Kjersti L. Cory Independent Trustee SCJ Fiduciary Services

kjersti@scjesop.com

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

What is Synthetic Equity?

 Synthetic equity is not actual ownership in a corporation

– No dividends

– No voting rights

– No right to information or dissenters’ rights

 Value is typically paid in cash and determined based upon the value of a company’s common stock at a set point in time

 Two common ESOP settings in which synthetic equity is issued

– Transaction Warrants

– Compensatory (typically executive) situations

Stock Appreciation Rights (appreciation award)

Phantom Stock (full value award)

Transaction Warrants

 A warrant gives the holder the right, but not the obligation, to purchase equity securities from the issuer at a specific price within a pre-established time frame

–

–

–

–

-Economically similar to a call option, although issued by the company

-Typically issued at fair market value (i.e., strike price)

-Economically dilutive to common stockholders

-Warrants are typically taxed at capital gains on all proceeds

 In corporate transactions (including ESOP companies), warrants are often issued in conjunction with subordinated debt

–

-Reduces current cash flow required to service debt (i.e., deferred interest)

– -Provides company with access to financing that would otherwise not be available

–

–

-Provides additional, equity-like, rate of return to lender to compensate for higher risk

-Offers some protection to the ESOP on the downside

 When analyzing a transaction with seller notes and warrants, one should ensure that the internal rate of return (“IRR”) to the seller does not exceed what is reasonable and appropriate, given prevailing capital market costs for debt financing with similar risk characteristics

–

-IRR typically between 10% - 15%

 Includes interest rate on the seller note and valuation of the warrant

Transaction Warrants - Continued

 In certain, less common, ESOP transactions, warrants are purchased directly by investors as a form of equity transaction financing

– Typically, the current shareholder group, along with potentially board of director members and executive management team members

– Provides the company (and ESOP) with access to equity financing that would otherwise not be available

– Provides direct equity exposure for the investors, along with the rewards and risks of such an investment

–

Offers some protection to the ESOP on the downside, as warrant equity is effectively “subordinate” to ESOP equity based on the strike price of the warrants

– Can offer management team members more equity exposure to the company, but with capital gain tax versus ordinary income characteristics

Executive Compensation Pie

Why Compensatory Synthetic Equity is Utilized?

 Use of synthetic equity as a benefit above and beyond the ESOP can be a complementary motivating instrument and is typically considered part of an LTIP

 Synthetic equity is a strategic way for companies to attain the four “R’s” in order to remain competitive within the overall marketplace:

– - Retention

–

-

– -

–

-

Recruitment

Reward

Retirement

 Synthetic equity plans are often used by companies to align management incentives with the returns provided to shareholders

–

- Motivates performance to achieve targeted financial objectives, i.e. the “transaction model” or long-term projections being used for the ESOP appraisal

-

–

–

–

-

-

–

–

Wealth accumulation based on financial performance

- Typically targeted to key employees

Part of total compensation, LTIP category

Market-based compensation, by dollar opportunity as well as total corporate dilution

- Performance benchmarks

Stock Appreciation Rights (“SARs”)

 Typically, issued at fair market value (i.e., strike price) and can be retention based or performance based

 Includes a term to maturity, vesting requirements, criteria for issuance

 Value of security dictated by value of common stock relative to strike price

 Economically dilutive to common stockholders

 Advantages

–

Long-term motivation of employees tied to shareholder gains

– Avoids issues of minority shareholder rights

– Employees do not have to actually purchase shares

– Company receives tax deduction when SARs are settled

 Disadvantages

– SARs are considered liabilities and must be valued every year until settled

– Typically, settled in cash, so represents a potential cash drain on the company upon settlement

– Employee pays ordinary income tax on all proceeds

Phantom Stock

 Typically, equivalent in value to value of common stock (i.e., no strike price), but holder does not enjoy the same rights as those of a common stockholder (e. g., voting rights, potential dividend rights, etc.)

 Includes a term to maturity, vesting requirements, criteria for issuance

 Economically dilutive to common stockholders

 Advantages

–

Long-term motivation of employees tied to shareholder gains

– Avoids issues of minority shareholder rights

– Employees do not have to actually purchase shares

– Company receives tax deduction when settled

 Disadvantages

– Potentially rewards employee even if share price does not go up

– Typically, cash settled, so represents a potential cash drain on the company upon settlement

– Employee pays ordinary income tax on all proceeds

Other Types of Incentive Compensation

 Incentive stock options (ISOs) –formal stock option plan – LTIP C-Corps, typically

– Numerous requirements

 Non-qualified stock options (NSOs) –options that do not meet the terms of Internal revenue Code 422 – LTIP C-Corps, typically – Offer more attractive tax terms for company than ISOs

– Less burdensome to meet IRS rules

 Cash awards – Short term bonus plans

– Executive bonus plans

 Performance based

 Annual plan

– Deferred compensation

– All amounts are taxed as ordinary income

Who Owns the Equity Value in an ESOP Company?

 Should the ESOP Trust hold all of the equity value?

 Many ESOP companies target equity value using SARs and warrants

Valuation Issues for Synthetic Equity

 The valuation should consider the economic cost of all synthetic equity when valuing an ESOP company

 Synthetic equity is a key factor when reviewing the fairness of an ESOP transaction taken as a whole

– Retention based versus performance based synthetic equity when implementing a transaction

– Total warrant amount and its contribution to IRR in the overall transaction

 It is important to understand the company’s philosophy of how it regards synthetic equity plans during the valuation process

– One time grant?

– Normal compensation for a group of employees?

– New awards granted each year?

– Annual valuations should include economic dilution to stockholders from outstanding synthetic equity units, as appropriate

Lender Consideration of Synthetic Equity

 General Lender Considerations

– Cash flow effects on synthetic equity

– Transaction warrant exercise period almost always falls beyond the maturity date of the senior financing

– How will the future liability of synthetic equity be funded?

 Senior/Lender Debt

 Cash paid via company liquidity

• This could affect future uses for cash, such as acquisitions, CapEx, growth and repurchase obligations

 Issuance of actual securities, which may be dilutive to shareholders

–

What is the valuation impact and total IRR consideration?

– Management is properly aligned with the performance of the company and locked-in.

 Important consideration in a transaction where long-time ownership fully exits the company

– Ensure synthetic equity is in compliance with all statutes (409(p), etc.)

Lender Consideration of Synthetic EquityContinued

 Leverage Covenants

– Liability accounting value of synthetic equity will generally not be included in the leverage test, unless the liability can be cash triggered prior to senior debt term expiring

– As senior debt leverage decreases, the ability to “re-load” and cash out synthetic equity becomes more attainable

 Fixed Charge Covenants

– Actual cash payments from synthetic equity awards included

 Similar to annual required repurchase obligations

– Accounting expense charges for increase in liability value typically not included

Transaction Case Study

 The company is an industrial machinery dealer and full-service rebuild shop that buys, refurbishes and resells used oil field equipment. The company specializes in pumps, engines, generators, compressors, pump parts, gearboxes, and other rotating industrial equipment

 Transaction Structure

– The company redeemed 100% of the company’s outstanding common stock from the selling shareholders for $25 million (the “Redemption Price”) in exchange for $10 million in cash and $15 million in seller subordinated notes (the “Seller Notes”)

– The Seller Notes had the following attributes:

 Maturity at the end of five years with cash interest of 5.0%

• Straight-line amortization

 The Seller Notes were issued with warrants to purchase an aggregate of 20% of the company’s outstanding common stock (the “Warrants”)

– The ESOP acquired 1,000,000 newly issued shares of common stock from company treasury and was financed with a loan between the company and the ESOP (the “ESOP Loan”)

– The ESOP Loan is payable over twenty years in equal annual installments of principal and interest.

– Interest payable at the current annual long-term Applicable Federal Rate (as defined under yearly IRS guidance)

Transaction Case Study

 Retention-based SARs

– Subsequent to the ESOP transaction, the Board of Directors of the company adopted a management incentive plan in the form of retention-based SARs (The “Retention SARs”). The Retention SARs accounted for 3% of the equity of the company on a fully diluted basis, and was granted to the company’s key management at post-transaction fair market value.

– Retention SARs:

 3% of the Company's equity were issued immediately following the closing date

 The Retention SARs were assignable and immediately vested

 The Retention SARs are exercisable after a 5-year lock-up period

 The Retention SARs are payable over a 3-year period upon exercise

 Performance-based SARs

– Post-transaction, up to 12% of the company's equity may be issued to key management as performance-based SARs (the “Performance SARs”). The Performance SARs shall be subject to a maximum of 2.4% of the Company's equity-- to be issued each year and split between key management upon achieving 105% or more of the company's annual ESOP adjusted EBITDA targets, on a cumulative basis.

 Allocation Overview

Transaction Case Study

Transaction Case Study

 IRR Analysis

 The expected cash flow from the Seller Notes generates an IRR of approximately 12.0% for the Selling Shareholders. The IRR is then compared to expected market returns

Synthetic Equity Structuring Considerations

 Transaction award vs. post-transaction plan

 Full value awards vs. appreciation awards

 Short-term, mid-term, or long-term time horizon

 Performance vs. retention

 Participant flexibility

 Participant elective participation

 Questions???

Jesse James Secret Word

ADMIN

• Please fill out a session evaluation form and drop it off at the table outside of this room

• Your feedback on topics and presenters is important and will be used to develop subsequent programs

• Remember that you need to scan this sessions QR Code by the door to get CE credit

 Peter is a Partner and Head of the ESOP Advisory Group at Pendo Advisors, LLC. He is a seasoned finance professional with experience in ESOP advisory services, fairness and solvency opinions, mergers and acquisitions, valuations for estate planning and financial reporting purposes, leveraged buyouts, management buyout transactions and private placements.

 Peter holds an M.B.A with Concentrations in Finance, Economics and Accounting from DePaul University’s Kellstadt Graduate School of Business. Peter also holds a B.Sc. in Finance from DePaul University.

Brian Hector, Partner, Morgan, Lewis & Bockius LLP

Brian D. Hector is a partner in Morgan Lewis’s Employee Benefits and Executive Compensation Practice and co-chair of the ESOP Task Force.

Mr. Hector focuses his practice on ERISA and employee benefits law, including the areas of ESOPs, qualified plans, all types of executive compensation, fiduciary liability, and related securities law issues. Mr. Hector is a nationally recognized ESOP attorney, who has advised several public and private ESOP companies with regard to corporate governance, succession planning strategies, ownership transition, and liquidity transactions.

Phone: 312.324.1160

Email: brian.hector@morganlewis.com

Mr. Hector has served as counsel to companies and shareholders regarding the use of ESOPs in numerous transactions, including equity repurchases, ownership succession transactions, leveraged buyouts, mergers, acquisitions, and corporate reorganizations. He has also represented lenders and trustees in ESOP transactions.

Mr. Hector has an impressive history working with all types of benefit plans and executive compensation arrangements. He has also represented several clients before the IRS and the Department of Labor in connection with ESOP and employee benefits matters.

Biographies

Kjersti L. Cory, Independent Trustee

 Kjersti Cory currently serves as Independent Trustee at SCJ Fiduciary Services, focusing on managing client relationships and ESOP transactions.

 Ms. Cory joined SCJ Fiduciary Services in 2022. Prior to joining SCJ Fiduciary Services, Ms. Cory worked in the ESOP Trust department at GreatBanc Trust Company. She has worked with employee-owned companies since the 1990s, providing trustee and ESOP transactional services to clients throughout the country. Ms. Cory’s experience includes the implementation of new ESOPs, secondstage ESOP transactions, redemption and sales transactions, mergers and acquisitions, as well as refinancing, restructuring, bankruptcy and liquidation transactions.

 Ms. Cory earned a bachelor of science in business administration, with an emphasis on finance, from the University of Missouri, and a master of business administration from Quincy University. She is a member of the ESOP Association and its Administration Advisor y Committee. Ms. Cory is also a member of the National Center for Employee Ownership and the Ohio Employee Ownership Center at Kent State University

CE Requirements - Onsite

1. Scan the session QR code upon entering the breakout room, using the Annual Conference Event app

2. Participate in the instructor-led question / discussion

3. Complete the CE survey via the session page in the mobile app

The Advantages of Video Media in ESOP Education

Kyla Alterman

Consultant

Jacob Covell

Media Specialist

3, 2, 1…ACTION

• Break into groups of 3

• One person start “filming”

• Answer one question:

• What does employee ownership mean to you?

• What is the most important thing employees need to know about employee ownership?

Why use video?

Know your “why” before starting video production!

• Provide consistent message for all employees

• To be viewed in employees’ own time

• Reach a dispersed workforce

• Standardize ESOP onboarding

• Build employee owner skills

• Keep ESOP top-of-mind

• Communicate important information in a new/engaging way

• Teach ESOP basics in small chunks

• Reinforce other meetings and training

Collaboration with Workplace Development

CEO Program

Collaboration with Workplace Development - Our Process

1. Identify needed video modules.

2. Collaborate and write scripts for your videos.

3. Storyboard and offer visualizations.

4. Capture content, pull from existing catalogue or stock website.

5. Video editing process. Go through multiple edits with your team to ensure the video captures your message in a clear way.

Resources / Tools

• Find employees that are excited & willing to work with you.

• Document everything related to your educational series.

• Let other locations know what you're looking for.

• Find a stock photo/video site that fits your needs to fill in the gaps.

• Hire an editor to put your series together if you don’t have an in-house team.

• Find a testing system that works for your team.

Tracking Results

Questions for Jake?

What to consider

• What quality do you want the video to be?

• Do you have a budget?

• Do you have a team to create or co-create the video?

• Do you want to hire professionals to create or co-create with you?

• Who will write the script and storyboard the video?

• How will the video be viewed/where will it be kept?

Ideas for videos

Recorded Teams/ Zoom call

Hybrid interview with slides or animation

Animated

PowerPoint

Professional

Videography

Professionally

Animated

MyPath Animated CEO Program

• 2-5 minute training videos

• Short quiz after each video

• Assistance with script and storyboards

• Hired a professional animator

• AACE-Award winning program

• Helps employees appreciate ESOP

• 2,000 employee owners with typical 50% turnover

• Among employees who earned CEO certification, retention rate is 97%

OCP Monthly Videos

• Communicate ESOP basics and company values

• Messages reinforced with biweekly nuggets

• Interviews with key people involved in the ESOP

• Committee involved in selecting new topics

D.C. Elevator Statement Video

• Personalized training that uses annual ESOP statement to communicate ESOP plan's benefits

• Shows employee owners how the ESOP works and builds ownership culture

Get employees to watch

• Enter in a raffle

• Swag & prizes

• Make it mandatory

• Lead up to in-person event • Watch in group meetings

What have you done at your company to get participation?

• Build into onboarding

Secret Word BBQ

The Advantages of Video Media in ESOP Education

Kyla Alterman Consultant

kalterman@workplacedevel opment.com

Jacob Covell Media Specialist