Employee Stock Ownership Plans (“ESOPs”) are qualified retirement plans that invest primarily in employer securities of the corporation that establishes the ESOP. An ESOP is a unique planning vehicle since it is both a financial tool and a retirement plan. Congress has created many special tax incentives designed to encourage the establishment of ESOPs and the concomitant increased employee ownership by employees who are participants in the ESOP. These tax incentives, when combined with the fiduciary rules imposed on retirement plans by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), create a tangled web of great financial opportunity and traps for the unwary. The ESOP Group at K&L Gates has been involved with ESOPs and related transactions since their inception and brings to bear on behalf of its clients the benefit of over 25 years of experience.

The ESOP Group provides a complete range of services relating to ESOPs, including the establishment of ESOPs, the structuring of corporate transactions involving ESOPs, fiduciary issues relating to ESOPs, S-Corporations as they relate to ESOPs and the special tax opportunities associated with ESOP transactions.

The ESOP Group's clients include corporations establishing an ESOP for their employees, shareholders selling stock to an ESOP, financial institutions lending to ESOPs, trustees of ESOPs, corporations acquiring another corporation that is partially or completely owned by an ESOP, investment bankers involved in structuring or evaluating ESOP transactions and representing corporations and fiduciaries in collective bargaining relating to the implementation of ESOPs.
The ESOP Group's extensive expertise and experience, when coupled with the corporate depth of K&L Gates, enables the ESOP Group to be particularly effective in consummating corporate transactions involving ESOPs.

To request a copy of Employee Stock Ownership Plans: An Overview, please send an e-mail to .

Corporate Sponsors
The ESOP Group assists corporations in analyzing whether an ESOP is appropriate for their particular situation. We assist the client with an analysis of the ESOP's financial impact, design and draft the ESOP, if it is appropriate, obtain a favorable determination letter from the IRS regarding the ESOP's tax status and assist the client in preparing a communications program to explain the ESOP to its employees.

The ESOP in this context may be designed to fund a corporation's match under a Section 401(k) plan, to buy out a particular shareholder, to be part of a management buyout or just to increase the equity interest of the employees in the corporation.

Tax Advantages of Sales to ESOPs
Section 1042 of the Internal Revenue Code (the “IRC”) provides that a shareholder of a private company who sells his or her stock to an ESOP may defer, and in some cases completely avoid, any income tax on the proceeds received from such sale if certain requirements are satisfied. These requirements include the reinvestment of the proceeds in qualifying reinvestment property within a specified period.

The ESOP Group has designed Section 1042 ESOP transactions having a value of over $2.5 billion. Our involvement includes restructuring the corporation so as to allow the shareholders to avail themselves of the Section 1042 deferral, the designing of specialized securities to be acquired by the ESOP, the implementing and negotiating of the ESOP acquisition and assuring that the ERISA fiduciary requirements related to the ESOP are satisfied.

The ESOP Group also assists clients with the reinvestment of ESOP sale proceeds in qualifying reinvestment property to insure the availability of the Section 1042 deferral and is experienced with all the monitization techniques available to allow the client to realize cash from the qualified reinvestment property without jeopardizing the favorable tax treatment.

As part of this process, we coordinate with the client's estate planner to insure that the unique estate planning opportunities available to Section 1042 reinvestment property are maximized.

Clients Acquiring ESOP Companies
The ESOP Group represents clients who are acquiring or investing in a corporation that is partially or completely owned by an ESOP. We frequently are retained as special ESOP counsel to assist a corporation's regular counsel in these situations.

Our work in this area includes:

• Due diligence to identify unique liabilities that are associated with the existence and initial establishment of the ESOP;
  
  
• Insuring that the ESOP fiduciary rules are complied with in connection with the acquisition or investment transaction;
  
  
• Negotiating the acquisition of the stock from the ESOP; and
  
  
• Overseeing the termination of the ESOP and the distribution of the ESOP assets to participants.
  

S-Corporations
An S-Corporation may establish and maintain an ESOP. Stated simply, an S-Corporation is a corporation that has elected to be taxed as a partnership. The main economic advantage of an S-Corporation is the elimination of double taxation to the S-Corporation's stockholders. The S-Corporation does not pay corporate income at the corporate level, rather the shareholders pay tax on their proportionate share of the S-Corporation's income. Since an ESOP is a tax-exempt entity, its share of the income is not subject to federal income tax. Each state must be reviewed separately to determine whether it recognizes pass-through entities such as S-Corporations.

The advantage this provides to an ESOP is very unique and can be best illustrated by an example: If an ESOP owns 100% of a company with $100 million in annual net income, there will be no federal income tax paid on the $100 million in annual net income. This tax advantage obviously can provide an ESOP-owned company with a real cost advantage over competitors. A company does not have to be 100% owned by an ESOP to take advantage of this tax treatment, but the 100% ownership example best illustrates the tax advantage.

The ESOP Group has extensive experience in analyzing whether an S-Election is appropriate for a particular ESOP-owned corporation and in restructuring a corporation to enable it to take advantage of the S-Election.

Fiduciary Representation
The ESOP Group represents major corporate fiduciaries and individual fiduciaries across the country in all types of ESOP transactions.

Our representation includes representing fiduciaries in connection with the purchase and sale of employer securities by ESOPs, in going-private transactions, in restructuring of troubled corporations owned by ESOPs, in obtaining new ESOP loans and the refinancing of existing ESOP loans and innumerable other transactions that require the ESOP fiduciary to exercise its discretionary fiduciary judgment.

• Advising the fiduciary regarding its fiduciary duties under ERISA;
  
  
• Insuring compliance with Department of Labor guidelines regarding fiduciary process;
  
  
• Performing due diligence with respect to the proposed transaction;
  
  
• Assisting the fiduciary in evaluating the proposed transaction;
  
  
• Assisting the fiduciary in the negotiating of the terms of the transaction; and
  
  
• Preparing and reviewing of transaction documents.

Litigation and Regulatory Compliance
We have been involved in a wide variety of litigation involving fiduciaries and ESOPs, both as lawyers and as expert witnesses.

We also represent corporations and fiduciaries in connection with DOL investigations of ESOPs and ESOP transactions.

The following is a sampling of the types of ESOP transactions in which K&L Gates has been involved:

• Ryan Associates: Represented the ESOP Trustee in a transaction in which a newly-formed ESOP acquired 30% of the stock of the Company.
  
  
• Raleigh Schwarz & Powell: Represented the ESOP Trustee in connection with the sale of the Company to the publicly traded insurance broker Brown & Brown, Inc.
  
  
• UAL Corporation: Represented the ESOP Trustee in connection with the labor/management acquisition of 55% of United Airlines.
  
  
• Avis, Inc.: Represented selling shareholders in the sale of Avis, Inc. to a leveraged ESOP for approximately $1.7 billion.
  
  
• Crucible Materials Corporation: Represented the management group in a leveraged ESOP acquisition of the specialty metals subsidiary of Colt Industries.
  
  
• Westinghouse Air Brake Company: Represented the Company in connection with establishment of an ESOP to buy stock from members of management and certain outside investors.
  
  
• Pamida, Inc.: Represented the Company and an outside investor group in taking a NYSE company private through a leveraged ESOP transaction.
  
  
• Dentsply International Inc.: Represented the management group in taking a NYSE company private through a leveraged ESOP transaction. Subsequently represented Dentsply in a $600 million merger with Gendex, Inc.
  
  
• Blue Bell, Inc.: Represented the Trustees of the Blue Bell, Inc. Profit Sharing Plan in the acquisition of the stock of Blue Bell, Inc. as part of a going-private transaction and subsequently represented the Trustees in the sale by the Profit Sharing Plan of its stock.
  
  
• Duraco Products, Inc.: Represented the management group in the leveraged ESOP acquisition of Phillips Products Co., Inc., a subsidiary of Phillips Petroleum Company.
  
  
• Adam Metal, Inc.: Represented the management group in a leveraged ESOP acquisition of an aluminum supply subsidiary of ALCOA.
  
  
• Morflex Chemical Company, Inc.: Represented the management group in a leveraged ESOP acquisition of the assets of an operating division of Pfizer, Inc.
  
  
• Simplicity Manufacturing Inc.: Represented the selling shareholders in the sale of the stock of Simplicity Manufacturing, Inc. to a leveraged ESOP.
  
  
• Xtek, Inc.: Represented the selling shareholders in the sale of Xtek, Inc. to a leveraged ESOP.
  
  
• Simmons Company: Represented selling shareholders in the sale of Simmons Mattress Company to a leveraged ESOP.
  
  
• Northwestern Steel and Wire Company: Represented the Company in taking a NYSE company private through a leveraged ESOP transaction for $250 million. This transaction was a joint labor and management ESOP transaction.
  
  
• Cargill, Inc.: Represented selling shareholders in the sale of a substantial block of Cargill, Inc. stock to the newly formed Cargill, Inc. ESOP.
  
  
• McDonnell Douglas: Represented the ESOP Trustee in connection with the McDonnell Douglas ESOP acquisition of $50 million of common stock.
  
  
• Coltec: Represented fiduciary committee of Colt Industries Savings Plan in connection with a proposed recapitalization of Colt Industries.
  
  
• Volvo, Inc.: Represented ESOP Trustee in connection with an ESOP acquisition of convertible securities of the North American subsidiary of Volvo, Inc. and subsequent sale of Volvo Cars to Ford Motor Company.
  
  
• Morgan Stanley & Co.: Represented ESOP Trustee in connection with acquisition of $60 million of convertible preferred stock by the Morgan Stanley & Co. ESOP.
  
  
• Houston Industries, Inc.: Represented ESOP Trustee in connection with the acquisition of $30 million of common stock by the Houston Industries, Inc. ESOP.
  
  
• Bain & Co.: Represented Trustee of the Bain & Co. ESOP in connection with the reorganization of Bain & Co. and subsequent sale by the ESOP of the Bain & Co. stock.
  
  
• Technology Service Corporation: Represented management group in connection with an ESOP acquisition of a subsidiary from Westinghouse Electric Company.
  
  
• National Spinning Company: Represented ESOP Trustee in connection with the acquisition of $50 million of stock by a leveraged ESOP.
  
  
• Argo-Tech, Inc.: Represented the Company in connection with the establishment of an ESOP and the acquisition by the ESOP of 30% of the outstanding stock of the Company.
  
  
• National Forge Corporation: Represented the ESOP Committee formed by the employees of National Forge in connection with the labor/management/ESOP purchase of majority control of National Forge.
  
  
• Bertholon Rowland: Represented the Company in connection with the formation and creation of an ESOP and the acquisition of 30% of the Company by the ESOP.
  
  
• Occidental Petroleum Corporation: Represented ESOP Trustee in connection with the establishment of a $1.4 billion ESOP for the MidCon subsidiary of Occidental.
  
  
• Marine Mechanical Corporation: Represented ESOP Trustee in connection with the acquisition of 100% of the stock of Marine Mechanical Corporation.
  
  
• The Northern Trust Company: Represented ESOP Trustee in connection with the refinancing of The Northern Trust Company's ESOP debt.
  
  
• Allstate Corporation: Represented ESOP Trustee in connection with the refinancing of $1 billion ESOP debt.
  
  
• Allied Group: Represented ESOP Trustee in connection with the refinancing of Allied Group's ESOP debt.
  
  
• First GrayLine: Represented ESOP Trustee in connection with the sale of $50 million of stock by the First GrayLine ESOP.
  
  
• Kerr-McGee: Represented ESOP Trustee in connection with the refinancing of Kerr-McGee's ESOP debt.
  
  
• Sara Lee Corporation: Represented ESOP Trustee in connection with the spin-off of four lines of business to separate corporations and the division of the Sara Lee Corporation ESOP among the separate businesses.
  
  
• Union Carbide: Represented ESOP Trustee in connection with the potential refinancing of Union Carbide's ESOP debt and conversion of certain convertible securities.
  
  
• Pharmacia & Upjohn: Represented ESOP Trustee in connection with the refinancing of Pharmacia & Upjohn's ESOP debt.
  
  
• Praxair: Represented ESOP Trustee in connection with the restructuring of the Praxair ESOP debt.
  
  
• HDH Corporation: Represented insurance brokerage business with respect to the establishment of an ESOP designed to defer tax upon sale to the ESOP.
  
  
• Marriott Corporation: Represented ESOP Trustee in connection with the establishment of a Marriott Corporation ESOP and subsequent purchase of $1.0 billion in employer securities by the ESOP.
  
  
• Price Brothers: Represented ESOP Trustee in connection with a tender offer for 100% of the equity of Price Brothers in a Section 1042 tax deferred transaction and subsequent S-corporation election.
  
  
• Schreiber Foods, Inc.: Represented ESOP Trustee in connection with the acquisition of 100% of the equity of Schreiber Foods, Inc. in a Section 1042 tax deferred transaction and subsequent S-corporation election.
  
  
• Kurtz Bros.: Represented ESOP Trustee in connection with a $14 million acquisition of a family-owned business in a Section 1042 tax deferred transaction.
  
  
• Sherwin Williams: Represented ESOP Trustee in connection with the establishment of Sherwin Williams ESOP and subsequent purchase of $200 million in Employer Securities by the ESOP.
  
  
• STV Corporation: Represented ESOP Trustee in connection with the acquisition by the STV Corporation ESOP of 100% of the equity of STV Corporation through a going private transaction and subsequent S-Corporation election by the ESOP.
  
  
• Pittsburgh Tube Company: Represented the Company in the acquisition of another corporation that was substantially owned by an ESOP.
  
  
• Astoria Federal Savings: Represented ESOP fiduciaries in connection with the merging of two ESOPs and related restructuring of ESOP indebtedness.