The article, "ESOPs: Measuring and Apportioning Dilution," is mathematically intensive and eminently practical. It solves a serious problem that caused many lawsuits before the article was published. When a business owner sells stock to a leveraged Employee Stock Ownership Plan (ESOP), the Company guarantees and eventually pays the loan that funds the sale. The moment after the transaction occurs, the firm has debt that did not exist before the sale. This causes a decline in the value of the stock-a phenomenon I term "dilution in value."
This article contains formulas to calculate the post-transaction values of the firm, the ESOP, and the exact amount of dilution to the ESOP's value before doing the transaction. That way, the Company and the ESOP Trustee can walk into the transaction with both eyes open, knowing the instantaneous impact of the sale on the value of the stock. The new, lower value becomes the starting point from which to measure future changes in the value of the stock, thus enabling management and employees to have an accurate starting point to measure management competence instead of guessing and blaming out of ignorance.
In 1995, Joseph P. Busch, III, a partner at the law firm of Gibson, Dunn & Crutcher wrote to me, "Your article is an intellectual masterpiece and of very practical importance. In 1990, I participated in the successful trial of the case Andrade vs. Parsons Corp., in which the plaintiffs attempted and failed to unwind a $500 million, 100% ESOP transaction. If your article had existed then, I would hope that the case never would have gone to trial, as your article explains exactly what actually happened and why."
|Available File Downloads||Size|
|(June 2004) The Tradeoff in Selling to an ESOP vs. an Outside Buyer||93.26 KB|
|(June 1997) ESOPs :Measuring and Apportioning Dilution||126.08 KB|
|(Jan. 1993) An Iterative Procedure to Value Leveraged ESOPs||123.28 KB|