The Employee Stock Option Plan and Selling a Company

Posted: November 16, 2015 | News

The Employee Stock Option Plan and Selling a Company

The Employee Stock Option Plan (ESOP) can be a great way to sell a company.  It eliminates the need to find a buyer, and the long, often tedious negotiations that go along with such a process.

A company owner who wants to sell his stock to an ESOP needs to be aware that he or she is required to invest his proceeds in what is known as “qualified replacement property” or QRP.

The definition of QRP is provided by Section 1042 of the Internal Revenue Code—it consists of “securities” of a “domestic operating corporation.”

Certain other rules also apply to the selling shareholder, both with respect to his shares sold to the ESOP, and the timing of his purchase of the QRP.   The selling shareholder must sell at least 30% of his company’s shares to the ESOP.   He must also buy the QRP within the “replacement period,” which is defined as the period starting 3 months before he sells his shares to the ESOP, and ends 12 months after the sale.

The term “securities” is essentially stocks or various types of corporate bonds.

The term “domestic operating corporation” is defined as (1) a U.S. corporation in which, (2) at the time of the purchase of the securities, and before the close of the replacement period, more than 50% of the assets were used in the operation of a trade or business.

Certain kinds of investments are prohibited:   QRP cannot be real estate, mutual funds, certificates of deposit, or government or municipal securities.

©2015. Brian J. Hogan.   All rights reserved.