The acquisition of a corporation owned in whole or in part by an employee stock ownership plan (ESOP) presents the acquiring corporation with several unique issues. Following a corporate acquisition, the buyer must decide what to do with the ESOP.

Usually, the former employees of the acquired company would have their ESOP shares rolled over into the shares of the new company ESOP. The acquiring company may also cash out the shares and roll the proceeds into an account in the former employee’s name in their 401(k) plan.

Alternatively, the company may purchase the former employees’ shares and cash out in exchange for a cash payment equal to the difference between the exercise price of the option and the price per share of the underlying stock to be received.

When a company establishes an ESOP, it accepts a fiduciary duty to its participating employees. This means that when your plan is cashed out, terminated or rolled into your new company's plan, the end result will typically be beneficial to the employee. A company could risk losing important company tax benefits it receives from the federal government for managing and maintaining an ESOP if the company does not adequately manage the transition of the employees stock options.

It is beneficial in the long run for the acquiring company to simply roll the employee’s ESOP into their own. The ESOP can be used to raise new equity capital, to refinance outstanding debt or to acquire productive assets through leveraging with third-party lenders. Because contributions to an ESOP trust are fully tax deductible, an employer can fund both the principal and the interest payments on an ESOP's debt service obligations with pre-tax dollars.

However, many acquisitions take time. Even after a company has been purchased, funds in the ESOP may be held in an escrow until all remaining issues, such as resolving any liabilities or conditions regarding the sale, are completed.

When the acquiring company merges the seller’s stock option program with its own program, former employees of the acquired company would have the ability to purchase shares in the newly formed company at a discount rate, replacing their previous ability to purchase shares in their original company.

Another excellent resource for information regarding ESOPs following a corporate acquisition is a finance, accounting and treasury related forum such as Proformative.com. Finance Forums provide an ideal opportunity to learn from professionals and experts in varied finance fields.

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