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Summary of Podcast on EP22 - How does a joint venture affect 409(p) with Cass Hollis - ESOP attorney from Bryan Cave Leighton and Paisner out of Atlanta GA - The Grid Wiki

EP22 - How does a joint venture affect 409(p) with Cass Hollis - ESOP attorney from Bryan Cave Leighton and Paisner out of Atlanta GA

Journey to an ESOP & Beyond

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| July 28, 2022

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This episode focuses on the general issues of 409(p) as it relates to S-Corp ESOPs and the nuances of how a company's other interests could affect compliance with the anti-abuse test. Cass Hollis offers a depth of wisdom and experience on the topic to point out to companies on a journey to an esop what to look for and potential solutions to work through the issue.

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Welcome to our podcast this is the ESOP guy and you are on a journey to an ESOP if this is your first time tuning in thank you so much for joining today this podcast.  Is a resource that we have put together to really help people understand the process of becoming an employee stock ownership plan.  In generally our audience is our listeners that are,  are not yet ESOP companies but they're thinking they're thinking about going through the process and so this podcast really does help people,  to try to take the certain topics and break them down so that you're not so overwhelmed by maybe the complexity of Aesop's,  and so if you have an interest in this podcast please,  go to our website at journey to an ESOP.com you can find all of the episodes this is our third season so one of the things that were as we do this what we're trying to do is also,  expand the expertise group and we're going to do that today and expand deeper into some topics so the topic today is going to be 409 p,  and 49p for those that haven't heard of the terminology is an antabuse test for companies that are going to become Aesop's or existing esops.    [1:25] But are s-corporation Aesop's and,  the idea behind the 49p test is that there are certain requirements and limitations regarding the the owned shares of the ESOP and so there are certain thresholds that you can't go above we're going to go into,  the detail on that and this is a very I would say this is a very important topic because.  If your company is going through the process of becoming an ESOP and there's a 49p issue you want to know early on so that you don't get too deep into the expense of an ESOP or two deep into your whole team working towards that,  so a lot of times the 409 p is going to be tested and it should be tested very early in the process.  But one of the things we're going to do today in order to really explore this area is,  Cass Hollis with Bryan Cave Leighton paisner out of Atlanta Georgia she's an ESOP attorney,  her particular area of expertise is concentrated in design implementation and ongoing compliance of qualified retirement plans.  And non-qualified retirement plans welfare benefit plans deferred compensation Arrangements bonus arrangements and Equity incentive plans,  Cass focuses on transactions involving Employee Stock ownership plans and includes representing companies lenders and trustees and connections with those ESOP transactions so I'm excited to have you on the show today cast thank you for joining us.    [2:53] Thanks for having me I'm looking forward to participating today.  So okay before we start I just wanted to kind of get to know you a little bit better tell us kind of what I know that you're a big sports fan tell us who your favorite sports teams are and and and really just tell us kind of why,  what how does it how does that mean.  I'm a born-and-bred South Carolina Gamecock I grew up in Columbia South Carolina my entire family went to South Carolina,  I've been going to games since I was about 3 years old I went to college there law school tech school  now my son's a rising senior they're so nice it's in my blood right my daughter is getting ready to go to the University of Georgia so I will not be saying go dogs everybody around me and Atlanta does but.  That I'm a huge Atlanta Braves fan I grew up watching the Braves with my grandfather and just to continue to be a huge fan and I don't live far from the stadium went to the game last night  cool today unfortunately lost,  it happens it happens well that's cool you're a big sports fan that's awesome and and so in your other and your off time you're an ESOP attorney as well.    [4:03] Right sorry I am so to go so let's go into your ESOP background a little bit tell us a little bit about how you got into the ESOP sand you know because it's a very special Niche I think for a lot of people to dedicate and right coming expert in.    [4:17] So I started practicing law in 1998 I came out of law school and got a master's in tax and when I started with.  The Firm that that was the predecessor to Bryan cave and Atlanta and now bcop,  Powell Goldstein I came into the irisa practice not knowing the first thing about any of it.  And one of the partners at the time Steve Schaefer was really involved in Aesop's and he was he was starting to do transactions.  He was you know he did a lot of counseling and fiduciary work with Aesop's like you know hit supported the litigation team,  and so I started working with him and got really involved in it not so much in the transaction piece of it at that time and then I took some time off to raise my kids and I came back to practice.  The end of 2016.    [5:16] And I'm still working with Steve and got really involved in the ESOP transactions when I came back because they seem to have taken off in the past.    [5:27] Probably 10 to 15 years so,  so I swear came started working and spending you know significant time on counseling you know Administration issues this year issues litigation support,  we have a great ESOP team and we do,  a lot of these up transactions and like you said we represent all sides all parties on all sides of the transactions I think you know the most interesting part really is  the company side though because you get to design that you design the transaction and,  deal with the structure and you know your it's just rather than on the trustees that you know sort of overseeing and.    [6:08] And reviewing all reviewing all the documents instead of doing them so yeah so I do like that side of it yeah it's fun because that's how I got back into it and I really enjoy it it's a great community,  yeah that's great so so I appreciate you being on the show today and just  your wealth of experience and knowledge and this this topic really came up because me you and Steve had like a breakfast meeting and kind of brought it up and I was like wow,  you know 49p is one of those areas where you can understand it but then there's nuances to it that we're going to get into that I think are going to be helpful for people,  so I think the best place to start is because again people some people are bringing or listening to this and like 49p what you know as soon as I throw out a code section it kind of throws him a little bit,  so let's let's kind of just go over that if you can give us an overview of the code section and I guess the biggest thing is why is it important you know to understand it but did not violate it if with with the in the context of having a nice.    [7:06] So  First of all you gave a good summary of the background of it and you know prior to 1998 he stops weren't even permitted to be shareholders of an s-corporation and so when the law changed.  And these apps could be shareholders of s-corporations there was a lot of abuse.  In the you know with these transactions and where you know a company's owner might sell its all of his ownership to an ESOP and then he would be the only participant.  And you know so we Sheltering the income of the company and still has the economic benefit of owning the stock so the IRS.    [7:46] Initially you know listed these transactions as so to speak one of their list of transactions which are that a list of transactions that specific transactions that they identify as potentially abusive so in 2001 Congress,  inactive for an IP to address the abuse situation.  And as you said the goal of it was to be sure that aspiration he's UPS covered a broad base of the company's employees and also allow the ESOP to benefit from the economic interest of the stock,  and not before and not for the there at the ESOP centers to be diluted.  By issuing other stock rights or other certain rights in the to the profits of the company outside of the ESOP.  So you know as you said the rules are incredibly complex but I'm going to give you a general overview of how it works and.  It's designed the for an MP test is designed to be sure that no more than fifty percent of,  the ownership of the company and when I say ownership I mean directly owned shares of stock any ownership attributable to an individual within the ESOP.    [9:02] And then any but I'm going to refer to as synthetic Equity that we're going to get into is going to be the focus of this conversation.  But you look at all of those pieces to see what an individual's.    [9:16] Ownership interest is and the goal is that no more than 50% of the deemed ownership of the company,  should be concentrated among individuals that are significant owners of the companies or their family members so the.    [9:34] In applying the rules basically any individual who is deemed to own more than ten percent.  The company's Equity is referred to we refer to them as a disqualified persons.  And there's also family attribution rules that we're a family group of Sport the 20% that there they also come into play but I'm not going to touch on those for purposes of this conversation.  If so if all of the disqualified persons in the aggregate own more than 50% of the deemed own shares of this S corporation than you fail to for a non key test.  And if you fail the for when for an MP test the results are disastrous.  Be there's an immediate income tax on the disqualified persons on all of the allocated shares.  There is a 50 percent excise tax that the company is responsible for on the value of the allocated shares owned by the disqualified persons and the synthetic equity.  And by the 12th at first.  And there's also the potential for plan disqualification and if the plans disqualified then you have the potential for loss of your S corporation status so it is a big fat mess.  I call it going now going nuclear it's yes it is you're gonna blow the whole thing absolute worst thing that can happen so that's why it's really important to pay attention to it,  and so the one piece of this that you know you might be wondering what in the world is that it equity.    [11:03] So let me just give you just a brief summary of what how the Internal Revenue code defines synthetic equity.  And it can because those I think is the trickiest part of this whole analysis because it's a bit the definition is incredibly Broad.  Basically if you think about a corporation it includes any right by any individual or any company for that matter to acquire stock of the u.s. corporation,  or any other rights that are based on the stock valuation stock value the company which would include stock options warrants restricted stock grants stock appreciation rate,  Spain I'm stop the all of those are considered to be synthetic equity and synthetic Equity also includes.  Deferred compensation could include certain Severance benefits and other benefits that are appear maybe in an employment agreement.  In it it also includes this is this is the tricky part any right that.    [12:07] Anyone has to acquire any stock or membership interests or assets of an entity,  the S corporation owns a part of I'm going to refer to that as a related entity any of those rights also should be considered,  for for the 49p test and so that's the tricky part and that's going to be the main focus of this conversation,  but if you want to give an example maybe you know just just a basic example yeah so let me get us going yeah I think that's great and you give us a good foundation of definitions because I know that when we throw out terminology for people,  synthetic Equity it just gets you kind of get lost in some of the weeds,  and I think the big the big picture here is that you definitely this is where having advisors is really kind of.    [12:55] Fundamentally critical to ESOP planning right you have to you have to have people help you with this early on so it's not it's not really needed to be like necessary to be.  I get I get all this in the first episode of really discussing it but just our general idea here is to just give you some exposure to the.  But the example is as Cassatt mention on deferred comp which is pretty common to have a deferred comp plan as when the company is going to be,  planning to pay somebody down the road and there's an economic benefit to that Deferred Comp and it's going to be plan to pay out and so so in the scenario that we're talking about let's just say the company is not an ESOP right now,  they have an existing deferred comp plan and let's just assume that the company as we go through the ESOP,  you know value it's basically valued at 10 million dollars in so it's a relatively small number but just giving the numbers are easier to do it this way,  they have an existing deferred comp plan of a hundred thousand dollars so the company has an outstanding,  as we put the ESOP together have they'll have an outstanding 1 million shares so the value of the stock turns out to be 10 dollars per share.    [14:07] So with a hundred thousand dollar deferred comp plan we're going to have to take the 100,000 divided by 10 and we're going to end up,  having an additional 10,000 shares what we call synthetic Equity that are going to then be allocated to the to the appropriate parties and so those parties are going to they're going to end up rolling up the allocation for the ESOP stock.    [14:30] The deemed ESOP stock plus the 10,000 shares depending on on there,  benefit of the deferred comp plan so so that 10,000 shares could push them above the thresholds that cast was mentioning before,  and create the Deferred or disqualified persons and even maybe push them into the to the problematic area of going above 50%,  of the total stock so so that's just an example of how Deferred Comp can play a part as synthetic synthetic Equity but in going through transactions one of the things,  that we're going to get into is the idea that sometimes companies have and this is one of the things I think is really interesting about this topic,  because people don't think about this a lot sometimes they have the company has other joint ventures,  when we say joint ventures were talking about a legal arrangement from one company and another that engaged together contractually to do say certain work.  And in that structure there could be potential for and IP issues and so from that standpoint Cass can you kind of give us an idea of how that how joint ventures can become a 409 P issue as well.    [15:42] Sure and to do this I think I'm going to start with an example and you know like you said you know a joint venture is it's just a business Arrangement between the S corporation and other third parties and typically.  Joint ventures going to be organized as an LLC or maybe some other form a partnership or Corporation but for this purpose let's just assume an LLC and so.  So we're going to assume that these two companies come together and they form an LLC will refer to it as the joint venture and one of the companies is an s-corporation it's owned by Nissan.    [16:19] So the LLC a joint venture is going to be governed by the operating agreement and that operating agreements going to describe the rights and obligations of the parties which would include a percentage of ownership.  How the projects manage the share of profits and losses for each,  and is also going to describe how do you exit what happens when one party wants to exit or sell their piece at the joint venture.  And that's the key part that we're going to be talking about.  You might see a right of first refusal meaning that if the part the party that's not be us for once out.  I'm sorry the escort wants out and said the escort under the LLC agreement has to go to the other party stay I'm going to sell.  To this unrelated third party but the document requires me to give you the right to buy it first so the other party has a right of first refusal to purchase the S corporations,  interest in the joint venture.  He could have a similar purchase right where maybe there's a triggering event within the LLC agreement say well if this happens,  then the other party has a right to call Ray or you know you have to you have to purchase this it's definite it's set out in the agreement.    [17:43] Those rights themselves.    [17:46] Are treated under the definition of synthetic Equity that they are synthetic Equity under the definition in the code and so the way that you would.  Would deal with this is you know how they were good pop example you said you've got a hundred thousand dollars worth of Deferred Comp that has to be converted into synthetic Equity shares basically and you do it based on.  The value of the S because S corporation stock so what you would do here is you would take that you would look at it the value of this joint venture and let's assume the S corporation and 50% of it.  And it's worth 10 million dollars.    [18:25] So the right that the purchase right to 50% of this joint venture.  It's going to have a fight so you'd have to Value it at 5 million dollars.    [18:39] And then you would convert that to shares in the s,  so that prop that's probably used a 10 million dollar value for desperation so let's use a 2 million 2 million dollar for this joint venture okay half of it 1 million same thing the tent you know you've got a 10 dollar Share value you convert that to.  The Sedalia Equity shares and that and then you would you would have to look at those synthetic Equity shares,  that are owned by this third party and you'd have to include those in your calculation to determine if that third party should be treated as a disqualified person so let's just assume for argument's sake that these purchase rights in this joint venture.  That this third party has gives that third-party A deemed 15% ownership.  In the in the S corporation because they can they can purchase a few percent of this related entity all right.  So okay so that that company is now a disqualified person and if you take that companies deemed ownership.  And you add it together with any other ownership interest by the other disqualified persons and it's more than 50% well then you failed the test.  And so another thing to think about too is if you are putting in a new ESOP.    [19:59] And most likely the company is going the S corporation is going to borrow money.    [20:05] Q2 blown and then from from the outside third-party Source they're going to loan that money to the ESOP to buy the shares of stock.  So the company is going to have debt on it which is probably going to depress the equity value at the company in the first first few years it will it was actually depress it yeah I mean also that will make the value of the synthetic Equity be even more.    [20:30] So you know that's why it's particularly important when you got your Equity value of your s-corporations going to be affected by the duck that may be a little too,  too detailed in the weeds for this conversation but but I'm just trying to emphasize the importance of taking stock of these purchase rights in joint venture agreement.    [20:49] Which I think you know and I needed a great job of covering it and I think what what I want to do is just go back and look at a little bit of it a little bit deeper if that's okay.    [20:59] So in the example the.  The joint venture between the existing s-corporation and then the other company through the LLC so they don't say it so it's a 50/50 percent joint venture.    [21:15] The purchase right that.  The company that their joint venturing with so let's just call the S corporation company a which is the ESOP.  And Company B is who they've joint ventured with so the LLC is kind of like this the 50/50 joining of A and B and so B Company B has the purchase right.  And when you say that they have the right of first refusal in the event that the S corporation are the joint ventures going to sell right.    [21:48] Well no it's the company B has the purchase right it's a right of first refusal to buy.    [21:58] Company a is interest in the joint venture okay there 50% in the joint venture got it great okay correct all right,  in other words if the if they were going to go offer it to a third party they'd have to come to Company B first and say hey I'm going to sell do you here's your do you want to buy it first right because that interest is going to be valued in the ESOP transaction correct.    [22:20] No the the it'll be valued as synthetic beat the value of that purchase right which the way that you would value that is.  You take fifty percent of the value of the joint venture.  And you convert that fifty percent to synthetic Equity shares that would be included in the 409 pee test got it okay.  So essentially you have to do a value of the joint venture to estimate what the value of the synthetic Equity arts and then convert that back to a and then those shares just like we did the Deferred Comp example,  well increase on the disqualified person so.  When we this is another question just about this qualified person so when we look at that that applies to the whole.  Disc and the disqualified persons test its normally I think applying specifically to my 40 and IP allocation of individual participants  right the employees right how do we get from the disqualified person,  you know the number of new shares that's created by the purchase right of the joint venture that's going to be synthetic Equity that's added back into the equation how do we allocate those shares into the disqualified persons is it just.  All the shares go in as additional shares.  Those are that the shares that are allocated to that purchase right are allocated to anybody but that company be.    [23:47] Okay so come buddy else has that right right right you you would allocate it to company be just like you would allocate,  a stock option to individual okay so all I see so if companies so that if that takes Company B who's not really a part of the ESOP right but if that takes them above the threshold than we've disqualified the plan.    [24:08] Okay that's where I was look I was looking at it because the disqualified person doesn't have to be a participant in the ESOP,  and that's and that's a that's the point I was trying to get to because I think it's yeah again I'm we're getting into this we're getting in at 40 9p like advance for people but yeah but I think it helps to solidify the idea of what is a disqualified person because,  Maya my first this is why I wanted to do this topic because my first understanding of all this was.  The disqualified persons was was part of the ESOP plan.  And if they're not part of that plan they don't really don't really matter right so but near what you're saying disqualify person really means anybody has access to or right to the shares.    [24:54] Or any of the yeah any of the,  Equity of the company yeah or any Equity of it's not just yeah it's not just limited to the ESOP yeah so it's any any you know like a lot of times you might have stopped you don't might have warrants in a transaction where where former owners old warrant,  but even though and the former owners probably aren't participating in the ESOP but you have to look at the warrants as synthetic equity and include those in your calculation.  Yeah and that's again like in a so the owner didn't participate in the ESOP.    [25:25] But they get warrants and so they're still going to have a 49p issue if they're above the threshold even though they're not part of right the ESOP and some cases they are in some cases they're not so it's,  and a lot of times you can plan for this you know you can still have synthetic equity,  and you can plan for it and make sure it's below the threshold but it's when you have unknowns like these joint venture agreements or Severance payments in an employment agreement,  where you might it might cause you to if you don't consider everything you might.  Think you're you think you're doing what you're supposed to and then you blow your limit because you forgot it from forgot to include these additional.    [26:03] Yes which is why I love this topic because I know that the example you guys gave me was you know you're getting all you've got no way through the almost the closing of the transaction and this whole issue comes up.  Right at the end of the right before the end of the transaction which is just like talk about not sleeping at night you know,  going through that process so it's so you guys discovered it and then went through some solutions to try to figure it out but more,  be much better right to do this way early in the process or yeah and that's typically typically what you would do,  this is how we would typically handle you know an ESOP transaction one of the first things we would recommend once we get a little bit down the road is for the company to retain an ESOP,  you know third-party administrator somebody that's you know it works in the ESOP space is familiar with 49p,  and to have them run a pro forma analysis of what your 409 pee test would look like if you took into account.  Everything that the company had at that time so you would look at you know stock options Stars everything we talked about Deferred Comp potentially Severance payments anything.  Anything that you would include these joint ventures you would run it all and see if you have a problem including all of that if you don't have a problem.    [27:25] Then you can move forward if you do have a problem you need to consider what you need to get rid of,  for what maybe you know is included in the test that maybe,  maybe you don't have to and my advice is always throw in the kitchen sink and then go backwards if you need to but it's good you know don't leave anything out because then and once you've identified whether you have a problem or not,  like for example you have a deferred comp plan you could go to Art go in and terminate it yeah it's not.    [27:55] It's not going to be and if you have a change of control with the sale of the company to the ESOP.  You know you're going to be able to distribute the different cop-out and so then that goes away.  But you have to pass this test every single day of the year it's not just you don't look at it,  Hannah yeah that's a good point you know on a in a vacuum yeah like like the payroll 40 for the 25 percent limit usually is on an annual basis but this one's it could be literally every day.  Um realistically probably wouldn't wouldn't even be that but it can be and I think what you said is really good and it's really important for people to think about in your advisor should lead you if you do feasibility work like when I do feasibility work,  that's that's part of the Step 2 of doing an ESOP plan so we're super early in the process I partner with a third-party administrator just to make sure that you know somebody else is looked our work,  as a quality control part of it but because it's it is so so critical but in the case that this thing gets through the cracks in the advisor.    [28:59] Doesn't look at it in your in the middle of closing what sort of what sort of ways could you deal with this issue.  In and kind of still make sure that you stop can close so let's just say you have the joint venture and you have the 409 P how could you work through that problem.    [29:18] So one of the things you could do at any and you know let me caveat this by saying there's not a lot of there's not a any specific law or regulation that that's going to,  say this is okay but this is this is a one one thing that you could do is,  the parties to the LLC agreement could agree to amend it to remove the right of first refusal remove these call rates.  And you know it cut could put in something different which we would refer to one of the things that you know we have,  looked at and and done several times you know again there's nothing in the law that says that this is okay,  but is instead of having a right of first refusal,  we'd set it up so you have a for sale basically the selling them basically the selling members interest that would be subject to the right of first refusal instead of having a right of first refusal,  basically the issue of requirement in the agreement that says that member has to initiate a.    [30:24] Commercially reasonable process and to find a buyer for this interest and it's very fact-intensive you know you would if you did it this if you did this you would want to have.  You know you would want to have some objective parameters like you know the process you have to fight you have to give 120 days or some reasonable amount of time to find a willing buyer,  and you have to have a process that stands up to scrutiny you know you really did try to find,  a buyer and then you know if you don't then the continuing member could purchase the interest but,  the way we looked at it as it's no longer a legally binding right this purchase right you no longer have a binding right to purchase this because you don't have the right of first refusal because you exercise that through the for sale.    [31:14] Right you've already so that's that legal that was that was our thinking on that is it's not you know if you don't have a binding right to purchase then,  it's not synthetic Equity is how you know we would think that the IRS look at it again yeah you know,  one of the things I want to be real clear about is that the fat it is so facts and circumstances,  here and if you know if this is something that anybody is thinking about.  You know I highly recommend that you you know you seek counsel and you know.  Don't do go out and try to just start putting putting these kinds of things into your joint venture agreement because it's very fact-intensive and there's not any specific law or regulation out there that so there's no guarantees that the IRS would even agree  there's no guarantees they would agree that even putting in adjunctive standards would work but it seems reasonable and part of it too is I think,  this part of the regulation this one piece of the regulation I don't think it was intended to be.    [32:17] Probably as broad as it is but unfortunately it's how it's written and you know there's no,  there's no way around it so there you have to think about it and you have to think about it you know so,  you know and I'll tell you like from practical experience I mean I think my and I talked to some tpas about this before our podcast because I wanted to get a sense for it they haven't seen you know haven't seen a lot of this stuff but I think partly,  it may be that that people aren't really looking at it and you know they might have a 49p issue out there and nobody knew about it or didn't want to think about it or whatever,  so that's why this is so important is to make sure that you at least you look at it so that you could avoid maybe a potential problem.    [32:59] Down the road well another thing to think about is it also depends on how you phrase the question of what you asked for.  When you're doing a 409 pee test because,  if you don't ask for joint venture agreements nobody's going to give them to you that's a good pair not going to think there's even remotely an issue yeah with that but so you have to be,  really careful about you as the administrator or t pa that's performing the test,  and asking for the information you have to be really specific about a you know and be as broad as possible so to try to cover everything it doesn't always need you,  get everything but that just to do the best you can you should be on their checklist  of like lets you know right here's my 4 and IP checklist give us give us all your crap you know you're operating agreements and,  look in all the details there with their let me ask you a question I can I think I asked you this before I just wanna make sure maybe a,  not a great question but on a buy-sell agreement if the partner has the right of first refusal to buy out the other partner.  Our shareholder does that is that purchased right the same the same kind of concept and synthetic equity on a buy-sell.    [34:11] It could be you know I think it just it depends on if you if.    [34:20] 50 you know if it's considered to be an interest in a related entity which related entity is any entity that the S corporation owns a part of so.    [34:29] Yeah so if I'm let's just I mean skin and give you like if I'm a fifty fifty percent company in you have an S corporation.  And one person selling their stock and the other person is not selling but they have a right of first refusal on the sale.  I'm just wondering I'm just kind of playing that out if they there would be a synthetic Equity issue there.  If you're in the ESOP I mean in this S4 the S corporation itself yeah let's just say one come one partner selling and the other partners not.    [35:00] You know and their 50/50 owners so you have a 50% ESOP does that make sense.  Pit so I so you have an S corporation 100% S corporation with two owners each own 50% one owner sells 50% of their stock into the ESOP the other holds their shares privately.    [35:24] Does that make sense so that's direct own shares yeah I mean you would have direct own shadow okay so I was just gonna I was thinking about Okay so,  I'm just think about the actual buy-sell agreement itself is there is there an issue with those.  You know purchase rights that you have in a buy-sell agreement or can you imagine a scenario where you have one.    [35:51] I don't know with the.    [35:55] So the the the other 50% owner is going to be the ESOP yeah that case.    [36:03] Well there's this there's an exception in the regulations for a right of first refusal for the ESOP and that that's not an issue here is and exceptions okay.  Yeah maybe I'm yeah I'm just kind of you know looking at any other operator other possibilities of issues but and I know we're kind of a little off the you know the centerpiece was really just the joint-venture piece that we've identified.  I think the Deferred Comp thing makes sense of course warrants and stars we didn't get into a lot of details on those because that's a whole another podcast but essentially those are synthetic Equity so those are,  does are usually calculated with shares anyway so that's that's the easier part honestly Deferred Comp a little more.  But typically more ants are you know in these transactions typically I think the warrants you know they're going to be settling cash.  But you would still base it on the value of the stock but.  You know any of those things could could be an issue and and even.  Even if an SM engine this earlier but think about like a severance payment and an employment agreement that extends over.  That would be basically extends over a year 2 years you know.    [37:20] That's going to be deferred comp and that's something that you need to consider and convert to synthetic Equity shares yeah now I will say that the severance piece,  I think some practitioners take the position that that's a really conservative view on whether Severance payment should be involved and there's also the question of,  you know what is deferred compensation because,  the code defines it under Section 409a not for an IP and you know so so there's there are some.    [37:53] People who look at it you know there's some wiggle room in there but I think the most conservative view is you would include it all in your class yeah like you said you have a problem you can re-evaluate you know where you're comfortable.  You're making some assumptions yeah so I think that's the right way to go because then you can always kind of look at what you feel good is more gray area and then go backwards as opposed to being surprised by a problem.  So that's pretty much all the time I know we've gone to a really good I think detail length of discussing that,  is there anything you would add to the to what people should think about I know we talked a lot about kind of trying to avoid this issue but any final comments with that.    [38:36] You know I just think.    [38:38] If you're considering putting in an ESOP you could it should be one of the first things you think about.  As you know you mentioned that it's one of the first things you should do it's not that hard to have a pro forma analysis done.  And and it's just that there was the consequences of not thinking about it and not handling it.  Are so bad that yeah you know if this is the road you want to go down that I think that would be one of the first things you think about yeah that's a deal deal killer if you can't get around it don't go any further right you know,  right and there are ways to get around it it's not the end of the world that you just had it's harder to do it.  Once you're already in the mess yeah and that's why doing it the front end my point is this like it helps to structure the ESOP transaction,  and shape the way it's going to look when you're done it with like for instance like you said.  And I had one of these deals where we just close the Deferred Comp before we close the ESOP I mean this wasn't it did we didn't want it we were using something else after the deferred comp plan so so it helps the structure make business decisions about how the ESOP is going to be implemented so I think that's part of,  I'll process itself.    [39:54] So yeah I agree well you did such a good job cast thank you so much like you know I think that's really helpful for people to think about so thanks for being on the podcast today and I really appreciate it.  I enjoyed it thank you for asking me great so for everybody else thank you for joining today and we will see you on this on the next step on this journey to an ESOP.

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About Journey to an ESOP & Beyond

ESOPs are gaining traction. In the "Journey to an ESOP & Beyond” podcast, Phillip Hayes explains the process of the ESOP transaction and addresses ESOPs from a business owner’s perspective. The "ESOP Guy" illuminates the simplicity of ESOPs as he debunks common misconceptions that ESOPs are immensely costly and complicated.

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