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ESOP Company Filing to Go Public - ESOP Valuation Impact?
Old 03-26-2019, 02:52 PM   #1
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ESOP Company Filing to Go Public - ESOP Valuation Impact?

My former consulting/engineering/environmentla/construction company has been privately held as an Employee Stock Ownership (ESOP) company under Subchapter S for some 35 years. They recently decided to go public, and have filed a draft notice with the Securities and Exchange Commission.

If they go public, the impact on the ESOP participants is that the shares that they hold will be converted to shares at publicly traded prices. Under the distribution rules of the ESOP, if you leave the company before age 62, you can't receive any buyouts until at least age 62. If you have over a certain amount in the ESOP, the buyout will be made in either three or five annual payments, based on the stock price during each distribution.

I will have to wait another 9 years to start the buyout process. I was wondering if any forum members have been through this process, and whether the ESOP shareholders are likely to lose, gain, or break even, and if there are any major issues I should watch out for? Since ESOP shares represent 20% of my retirement assets, this is a fairly major concern.

I have no control over any of this, but am wondering if I should work longer to mitigate the possiblity that the ESOP payout after IPO conversion is significantly less than current value. It seems that under Subchapter S, the company hodling the ESOP has a responsibility to maintain the share value, and is subject to being sued if they don't, so maybe I should not worry?

Thank you!
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Old 03-26-2019, 03:42 PM   #2
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I would ask HR if the stock you receive after the public conversion will be restricted in any way. IANAL but I am pretty sure that once the ESOP ceases to exist and the employees are issued common stock, the ESOP rules also cease to pertain. So to the extent there are rules, they are new ones and will have to be established as part of the IPO. I would also get a copy of that SEC notice to see what, if anything, it says about stock restrictions on former ESOP owners.

That said, it is not uncommon for stock held by insiders to be restricted after an IPO. Usually, though, I think it is for a specific period of time, like a certain number of years. The idea is to not have a potential overhang of stock that could come on the market quickly and damage the IPO buyers.
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Old 03-26-2019, 06:29 PM   #3
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...to the extent there are rules, they are new ones and will have to be established as part of the IPO. I would also get a copy of that SEC notice to see what, if anything, it says about stock restrictions on former ESOP owners.
Unfortunately, the draft SEC notice is confidential, and not available to the public or the ESOP shareholders at this time. The rules for distribution requests after the IPO have not been finalized. Thanks!
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Old 05-21-2019, 04:44 PM   #4
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So, Parsons (PSN) went public, and the stock immediately went up, raising my ESOP share values by 25% initially. It's been going up out of sync with the market (it's generally been going up when the market goes down, and today, it went up at nearly 3X the % that the overall market did). This is all great, for now, but how long will it last!? I see no reason for its rapid rise!
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Old 05-21-2019, 07:20 PM   #5
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Here's my missed opportunity. I worked for a company of about 500 employees in the early nineties. I just got hired, so was fairly broke and eking out a payday to payday living.

Anyhoo, the company went public at about $20 per share. The ESOP participants were happy with a nice boost in value over the ESOP price. Shortly after the IPO, the company was acquired in a very cozy deal, where the stocks (still hovering around $20) were purchased in the mid-$30 range by a much larger company. Everyone was celebrating new wealth.

Then, along comes a Fortune 200 conglomerate with eyes on a particular division of our new parent. A hostile (and I do mean hostile) takeover ensued that needed anti-trust approval, including some spin offs of what would be the new company. Our existing company was trading in the ~$50 range. The new mega-parent acquired us at +$80 per share. So, in about 18 months, I watched some folks grow wealthy almost by pure happenstance. I was not so lucky. I had less than a grand in the ESOP kitty. But I was happy for many folks and amazed at what unfolded. May you have a similar ride.
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Old 05-21-2019, 07:29 PM   #6
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You said you can't sell for 9 years, right? I wouldn't stress over the price now. It'll settle into what it should be in due time.

One thought, to protect your investment, are you allowed to short the stock? I don't know if you'd be able to short it for 9 years, but as it gets close to that time, if it's at a price you like you might consider doing that to basically lock in the price.
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Old 05-21-2019, 07:37 PM   #7
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You said you can't sell for 9 years, right? I wouldn't stress over the price now. It'll settle into what it should be in due time.

One thought, to protect your investment, are you allowed to short the stock? I don't know if you'd be able to short it for 9 years, but as it gets close to that time, if it's at a price you like you might consider doing that to basically lock in the price.
Yes, they won't pay me out for 9 years, or until I hit 62. My restricted shares will be paid out over a 3-year period, with prices to be determined by the market price each year. Since ~80% of the company stock is held by ESOP participants as restricted shares, I don't think there's any way to short, sell early, or otherwise find a safe shelter; it also means a hostile takeover of the company is not possible (I believe). I may be able to diversity a very small portion at age 55.
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Old 05-22-2019, 12:35 AM   #8
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I think once your shares are converted to publicly traded shares you are free to do with them as you please, barring any lockup agreement you signed with the investment bank that led the IPO. My company filed S1 last week with IPO in next 60 days or so. We have a 6 month lockup period
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Old 05-22-2019, 07:32 AM   #9
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As a long-time holder of individual stocks, I've been through quite a few "deals". Not the specific going public one you face, but what I've learned is that the big wigs want to cash in and get money out as quickly as possible. They are often restricted, but the small guy isn't. The key rule I have is not to wait.
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Old 05-22-2019, 01:07 PM   #10
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...Not the specific going public one you face, but what I've learned is that the big wigs want to cash in and get money out as quickly as possible. They are often restricted, but the small guy isn't. The key rule I have is not to wait.
There is a 180-day lock-up period, where the ESOP can't sell shares (the ESOP holds all the shares, and they're assigned to the employees, but not held by them). The ESOP pays out the cash value of the allocated shares after the employee leaves the company at age 62 or later (over a 3 or 5-year period for larger distributions). The ESOP was formed to allow the corporation to enjoy a Subchapter S corporation status (eliminating corporate taxes on most of their annual net profit by using the funds for ESOP payouts). Per my specific ESOP's current rules, I can't request a distribution of the shares until I turn 62, as I've already severed my employment with the company. The FAQs created during the run-up to the IPO made this crystal clear, unfortunately. I'll be able to roll these shares over into an IRA.

I'm still not sure if Parsons will, on an annual basis, make more shares available to purchase publicly, selling them on the open market when employees request distributions, or whether they'll continue to pay the ESOP participants out from their profits and retain all the shares. They stated that they intend to continue the ESOP. The SEC filing stated that the ESOP holds ~80% of the total shares, which means that the public shareholders will not be able to take over control of the board/company.
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Old 05-22-2019, 04:16 PM   #11
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When a business goes public early investors are often subject to a lock-out period. It is 6 months for Uber venture capital and founders.
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Old 05-23-2019, 08:07 AM   #12
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I'm also in this ESOP. There's a lot of things I think I'd want clarification on:

1) Age 55 Diversification - I see this requires 10 years participation in the ESOP. I'm not sure if that means basically 10 years of service at Parsons under the ESOP, or it means your first ESOP shares were from 10 years ago. (So, for instance, if you had only worked at Parsons 8 years and left at 52, could you diversify at 55 or not?).

2) Age 62 Early Retirement - I don't completely understand the distinction the plan is trying to make for 62 vs 65. It may be that at age 65 you can access your vested shares even if you never 100% vested. But I can also read it to mean you can access at 62 if you retired *from Parsons* at 62.

Most likely, I'd be able to access early because some medical issues will eventually push me over to disability, so I'm not super concerned. But otherwise, I'd be nervous having such a big component of my net worth in one company. I've seen way too many cases of people getting burned by this.

For others reading...the way this ESOP works is that the company grants you these shares into a trust that, once they vest, you can access at retirement. I don't think think they ever give you the actual shares, they just give you disbursements, which I'm assuming just look like income (same as withdrawing from a 401K). The only real practical effect of the company now being public are that the shares are now valued on the market instead of privately by appraisers. (It's been a nice little run up from the last appraised value to the current market price).
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Old 05-23-2019, 08:56 AM   #13
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I'm also in this ESOP. There's a lot of things I think I'd want clarification on:

1) Age 55 Diversification - I see this requires 10 years participation in the ESOP. I'm not sure if that means basically 10 years of service at Parsons under the ESOP, or it means your first ESOP shares were from 10 years ago. (So, for instance, if you had only worked at Parsons 8 years and left at 52, could you diversify at 55 or not?).

2) Age 62 Early Retirement - I don't completely understand the distinction the plan is trying to make for 62 vs 65. It may be that at age 65 you can access your vested shares even if you never 100% vested. But I can also read it to mean you can access at 62 if you retired *from Parsons* at 62.

Most likely, I'd be able to access early because some medical issues will eventually push me over to disability, so I'm not super concerned. But otherwise, I'd be nervous having such a big component of my net worth in one company. I've seen way too many cases of people getting burned by this.

For others reading...the way this ESOP works is that the company grants you these shares into a trust that, once they vest, you can access at retirement. I don't think think they ever give you the actual shares, they just give you disbursements, which I'm assuming just look like income (same as withdrawing from a 401K). The only real practical effect of the company now being public are that the shares are now valued on the market instead of privately by appraisers. (It's been a nice little run up from the last appraised value to the current market price).

I work for an ESOP company also with around 500 employees. Ours is 10 years in the program from the original effective plan date of 1 Jan. 2006 AND 55 years old in order to diversify. The “official retirement age” under our plan is 59 ˝. I was 50% vested when the ESOP went into effect in 2006. I only had to wait 3 more years to become 100% vested. The stock opened at $14.18 per share in 2006 and today it is $222.23 per share. I just turned 59 in March of this year. What a ride this has been. I started working at this company in 1998 when it was privately owned. If it was still privately owned today, I would get a handshake and a kick in A$$ as I walk out the door when I retire. The rise in our ESOP has really caused me to think hard about when I want to retire.

Mike
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Old 05-23-2019, 11:58 AM   #14
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I'm also in this ESOP. There's a lot of things I think I'd want clarification on:

1) Age 55 Diversification - I see this requires 10 years participation in the ESOP. I'm not sure if that means basically 10 years of service at Parsons under the ESOP, or it means your first ESOP shares were from 10 years ago. (So, for instance, if you had only worked at Parsons 8 years and left at 52, could you diversify at 55 or not?).

2) Age 62 Early Retirement - I don't completely understand the distinction the plan is trying to make for 62 vs 65. It may be that at age 65 you can access your vested shares even if you never 100% vested. But I can also read it to mean you can access at 62 if you retired *from Parsons* at 62.

Most likely, I'd be able to access early because some medical issues will eventually push me over to disability, so I'm not super concerned. But otherwise, I'd be nervous having such a big component of my net worth in one company. I've seen way too many cases of people getting burned by this.

For others reading...the way this ESOP works is that the company grants you these shares into a trust that, once they vest, you can access at retirement. I don't think think they ever give you the actual shares, they just give you disbursements, which I'm assuming just look like income (same as withdrawing from a 401K). The only real practical effect of the company now being public are that the shares are now valued on the market instead of privately by appraisers. (It's been a nice little run up from the last appraised value to the current market price).
1) I believe the 10-year diversification rule means that you have to have been in the plan for 10 years, not that you have to have worked there 10 years. My statement issued this year discussed "Pre 2010 Shares" (not subject to diversification rules) and "Post 2009 shares", which will be subject to diversification rules once they're been held 10 years and you're 55 or older. You can call the Parsons benefit center to confirm.

2) According to a Parsons PowerPoint on the ESOP, distributions may be made once you "Reach retirement age of 65" (assume this means you're still working at Parsons), or at the "Early retirement age of 62 if fully vested" (assume this means you're no longer working at Parsons). If you're not fully vested when you leave the company, they may make you wait until 65 unless you suffer permanent disability or die; you could return to work at the company between 62 and 65 if less than a 5-year service gap occurred, and continue your previous vesting schedule.

Hope this helps. You can contact the Parsons Employee Benefits Center or Retirement Focus to confirm:

Phone: 1.855.539.8695
Hours of Operation:Monday - Friday, 7:00 a.m. - 7:00 p.m. CT.
Email: ParsonsESOPCommunications@findley.com
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Old 05-23-2019, 12:02 PM   #15
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I work for an ESOP company also with around 500 employees. Ours is 10 years in the program from the original effective plan date of 1 Jan. 2006 AND 55 years old in order to diversify. The “official retirement age” under our plan is 59 ˝. I was 50% vested when the ESOP went into effect in 2006. I only had to wait 3 more years to become 100% vested. The stock opened at $14.18 per share in 2006 and today it is $222.23 per share. I just turned 59 in March of this year. What a ride this has been. I started working at this company in 1998 when it was privately owned. If it was still privately owned today, I would get a handshake and a kick in A$$ as I walk out the door when I retire. The rise in our ESOP has really caused me to think hard about when I want to retire.

Mike
If you can't diversify a significant percentage of your shares, and you have enough to retire, I'd consider retiring ASAP to preserve the high valuation of the shares, especially if they represent the majority of your assets. You could also go find another j$b if you had to!
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