The ESOP as the Majority Stockholder – Part IV

Colin M. Henderson ­ Spring 2003

Private Company ESOPs

Generally, public company investors rely on regularly published financial information, security analyst’s reports, and empirical market data (such as, but not limited to, stock price and trading volume) to maintain an awareness of the value and condition of their investments.

In contrast, private companies seldom publish comprehensive financial reports or commentary. And, there are neither empirical market data nor security analyst’s reports available to investors of private companies.

Private company ESOP trustees must rely on a more informal series of contacts with the company and its management in order to obtain information. This type of information may include reviewing the company’s monthly or quarterly P & L and budget, the company’s internal newsletter, the company business plans, minutes of management/board meetings, and so on.

Once a year, the private company ESOP trustee, using the services of a qualified financial advisor, is required to conduct an independent appraisal of the private company’s stock that is held by the ESOP trust. This appraisal will determine the stock’s hypothetical fair market value.5

Based on the results of the annual ESOP appraisal, the emploter corporation common stock fair market calue will be:

  • reported to the participants and beneficiaries the value of their vested and non-vested prospective benefits,
  • reported to the Internal Revenue Service on the plan’s Form 5500 annual return,
  • included in the trust’s financial reports, and
  • used for determining the value of transactions between the plan or company (put option) in the settlement of benefits involving the repurchase of ESOP shares from a departing participant of beneficiary.

Part III   |  Part V