Simultaneously, the company sells such stock to an ESOP in exchange for a note payable (hence the term "
Leveraged ESOP").
The ESOP structure can combine bank or other commercial borrowings (a "
leveraged ESOP") with subordinated debt and warrants to selling shareholders that provide them with both a current cash return and participation in the future success of the company.
Under a
leveraged ESOP, funds are borrowed to purchase the shares from selling owners, and the shares are released to plan participants as the ESOP pays down the debt.
employer-securities is known as a "
leveraged ESOP."(19)
How do you know if your company might be a good candidate for a
leveraged ESOP? It might be, if it has all of the following characteristics:
Michael Oneal, a Tribune reporter, worked out the numbers, and as he said, there is a "rich upside and chilling downside" to the heavily
leveraged ESOP deal.
A
leveraged ESOP easily fits into going-private transactions.
In a
leveraged ESOP, the company borrows money, then loans it to a tax-favored ESOP trust created specifically for this purpose.
"Furthermore, under current law, employers may deduct dividends paid on employer stock held in an ESOP, provided that either the dividends are paid out in cash to plan participants or the dividends are used to make loan payments for a
leveraged ESOP. No deduction is permitted for dividends paid to employees who keep their dividends in the plan, reinvesting them in the ESOP.