FUELING GROWTH THROUGH ACQUISITIONS Michigan Chapter Spring Conference April 11, 2018 Justin W. Stemple Warner Norcross and Judd LLP 900 Fifth Third Center 111 Lyon Street NW Grand Rapids, MI 49503 616.752.2375 jstemple@wnj.com Goal of this part of the session is to discuss the impact on your ESOP from acquisitions – going to focus on the most common issues that are often overlooked; leave the complex transaction structuring issues for another time

Acquisition Fundamentals Stock/Equity Assets Merger Focus on buyer/seller desires; liabilities; tax may impact that decision

Service Crediting Assets – discretionary New hire Amend to grant credit Eligibility Vesting Allocations Service Compensation

Service Crediting Stock/Equity/Merger Eligibility - mandatory Vesting - mandatory Allocations – discretionary Service Compensation

Integration Business Operations Culture Employment/Compensation/Benefits Business operations may be the primary focus, but make sure someone is tasked with paying attention to these other important issues.

Can my ESOP help me as a buyer?

Non-Financial Incentives Our employees are owners; yours can be too Culture of stewardship and caring for employees and their families Continued legacy ESOP statistics ESOP companies average less layoffs than non-ESOP companies (4x less likely!) There are non-financial reasons why an ESOP company may be an attractive buyer. Could be enough to make the difference if purchase price is similar.

Non-Financial Incentives Greater than average retirement benefits; ESOP is an “extra” retirement benefit 401(k) program Bonus program ESOP positions company to be sustainable and independent; built on the collective efforts of the employee-owners who benefit from those efforts through the ESOP There are non-financial reasons why an ESOP company may be an attractive buyer. Could be enough to make the difference if purchase price is similar.

Financial Incentives Asset purchases No direct financial incentive to seller Minimize transaction costs Minimize successor liability Higher purchase price than competitors justified by making the acquired entity tax- free (if 100% S corp. ESOP)? ESOP valuation firm may not given an opinion on that higher purchase price b/c they have to value companies assuming they pay taxes, but Board of directors could consider it as part of long-term strategy to grow

Financial Incentives Section 1042 tax-deferral opportunity – cash proceeds with deferral of all federal and state capital gains tax, and may possibly avoid all capital gains tax upon death

Financial Incentives Section 1042 tax-deferral opportunity Pros: Higher net proceeds to seller Reinvestment in other operating companies that qualify as QRP Estate planning: Step-up in basis on death

Financial Incentives Section 1042 tax-deferral opportunity Cons: Higher transaction costs Greater complexity in transaction QRP requirement for seller Buyer assumes liabilities of seller

1042 Requirements Seller must have owned stock for at least three years prior to sale Stock must not have been acquired as stock options, restricted stock, or from a qualified retirement plan Must be taxed as a C corporation ESOP must own at least 30% of the company after the transaction Reinvestment in QRP within 12 months Tacking of prior entity ownership (LLC) Can convert to C corp for sale

QRP Must be a security of a US operating company (public or private) Common or preferred stock Corporate bonds or floating rate notes Not mutual funds, government bonds, REITS, CDs, ETFs

1042 Transaction Highlights Target forms ESOP Target ESOP buys 100% of Seller’s stock (note) Target ESOP and Buyer ESOP merge (ESOP is 100% owner of two corporations) Buyer and Target corporations merge, exchanging the ESOP’s Target stock for Buyer stock (stock still held in suspense) Refinance Seller Note with internal loan; Seller is paid off in full in cash Not covering Structure depends on entity status of the buyer and seller; example assumes buyer is 100% S corp ESOP

Sounds complicated? Worth the cost and complexity? Sophistication of the seller and seller’s advisors, or willingness to learn? Seller’s basis in stock? Seller’s goals (estate planning, reinvestment, needs money for retirement, etc.) Buyer (S corp. or C corp.) Seller entity (LLC, LP, S corp., C corp.)

Other Complicated Options! Capital raise by introduce new investors (e.g., private equity, family office, management) to fund growth or repurchase obligation Joint ventures Drop-down LLC

Thank You! Justin W. Stemple Warner Norcross and Judd LLP 900 Fifth Third Center 111 Lyon Street NW Grand Rapids, MI 49503 616.752.2375 jstemple@wnj.com #17016977