The Role of Advisors to the Selling Shareholder
in Negotiations with the Independent ESOP Trustee

By Ronald J. Gilbert
ESOP Services, Inc.


Shareholders intending to sell stock to an ESOP represented by an independent trustee must decide who represents their interests in the transaction. While the seller may act on his own, the Independent ESOP Trustee never will.

Independent ESOP Trustee

As ESOP transactions grow larger (transaction amounts of $10,000,000 to $20,000,000 plus are not that uncommon) the ESOP is more frequently represented by an independent trustee or independent fiduciary. Whether it be an initial ESOP transaction, or a second or even third-stage ESOP transaction, independent trustees are being appointed more often by the corporation’s board of directors to represent the interests of the ESOP in a transaction. Sometimes referred to as the “transaction trustee”, these independent fiduciaries can represent the ESOP only for the transaction itself, or can remain as an ongoing independent trustee.

Plenty of Help

The ESOP trustee will normally retain ESOP legal counsel, as well as a financial advisor. This financial advisor may well be the independent valuation firm that has been doing the ESOP appraisal, but the trustee is not bound to use that firm, and might select another firm. The trustee will rely heavily on the input of these advisors. The advisors, in turn, are usually very experienced in ESOP transactions, and typically have “teamed” with the ESOP trustee in prior transactions.

While the ESOP trustee and his advisors are making sure that the ESOP gets a fair deal, the trustee may also attempt to negotiate a “good” deal for the ESOP. It’s common knowledge that the ESOP can pay no more than fair market value. But it is certainly acceptable, and from the perspective of the ESOP trustee, preferable, that the ESOP pay something less than fair market value in an ESOP transaction. So selling shareholders may find themselves negotiating with the ESOP trustee and his advisors, in a proposed ESOP transaction. But the selling shareholders may also negotiate. In fact, having retained an independent trustee, they are clearly at liberty to pursue their own interests in the ESOP transaction.

Who Represents the Sellers?

Sellers are at a tremendous disadvantage unless they have their own legal counsel, as well as their own financial advisor. Both parties play an essential role in advising the selling shareholders. However, if these advisors are not experienced in negotiating a transaction with an independent ESOP trustee, then there may be a role for one more party – a special advisor to the shareholders.

Special Advisor

The primary role of the special advisor is to negotiate the most favorable price, terms, and conditions for the selling shareholders. Just as the ESOP trustee heads up a team of advisors who assist him in making his decisions, the special advisor heads up the team representing the selling shareholders. A significant difference comes from the fact that the ESOP trustee makes the final decision for the ESOP, whereas the selling shareholders make the final decision for themselves, based on input from their advisors.

But is negotiating with an ESOP trustee an acceptable practice from the trustee’s perspective? Absolutely! All experienced independent ESOP trustees have negotiated with selling shareholders numerous times in the past, and will negotiate with selling shareholders as a normal part of the process.

What’s to Negotiate?

Price immediately comes to mind. But settling on an acceptable price is, or should be, much more than an exercise of I think it’s worth “x” versus you think it’s worth “y”. For example, marketability discounts can vary by a factor of two or more. And, just because a stock has had a particular marketability discount applied to it in the past for ESOP purposes does not necessarily mean that same marketability discount is appropriate today. What about control? Is the ESOP acquiring a controlling interest, and if so, is the ESOP paying a control premium? Does the ESOP already have control, and if so, is it partial control or total control? In addition, are there other actions that shareholders must agree to, such as an S Corporation election, that give shareholders additional leverage?

Will the ESOP loan be two-tiered, and if so will the pay down of the company-to-ESOP loan be over a significantly longer period of time than the bank-to-company loan? Is so, then shares will be allocated to the ESOP over a substantially longer period of time than is required to pay the bank debt. How much longer can the company-to-ESOP loan pay down period be versus the bank-to-company pay down period?

If the ESOP is initially acquiring a minority interest, but has an irrevocable commitment from selling shareholders that will allow it to acquire a majority interest, will the initial sale to the ESOP be at majority value? If so, what guarantees must the selling shareholders provide to assure the ESOP of actually gaining the majority interest? To what extent must the company and shareholders go to execute a second stage control transaction?

If you visit our web site, you are greeted with the statement “…. the Answer to Every ESOP Question is ………, “It Depends!””. I submit that “It Depends” also provides the answer to most of the questions posed above.


Keep in mind that when shareholders are considering whether or not to sell stock to an ESOP, they frequently have other alternatives, especially in certain industries. Of course, tax benefits such as the “tax-free” rollover and tax-free S Corporation income are attractive incentives for stockholders to sell to the ESOP. However, it is certainly not unheard of for shareholders to be in a position to sell stock to an outside strategic buyer for a substantial premium that, even after paying capital gains taxes, results in more than the ESOP can pay (and the outside sale might also qualify for a tax deferral to the sellers). ESOP trustees, while attempting to negotiate a “good deal” for the ESOP, must not lose sight of the fact that ultimately their job is to see that the ESOP does not pay more than fair market value for the stock that it acquires, and that it is a “fair” deal for the ESOP. More and more often shareholders have options beyond selling to the ESOP. Many times they would prefer to sell to the ESOP, and see the company perpetuated and the people who helped build the company over many years rewarded for their loyal efforts. But just because they have a preference to sell to the ESOP, and just because the ESOP brings certain tax benefits to a transaction, this does not mean that the selling shareholders are willing to receive less than a fair price for the stock sold to the ESOP.


Knowledgeable selling shareholders will negotiate with the independent ESOP trustee, represented by legal and financial counsel, and perhaps as well by a special advisor in situations where the circumstances warrant it.

Link to Bio for Ronald J. Gilbert