The Employee Ownership Trust, an ESOP Alternative

Summary

For the last four decades, an employee stock ownership plan (ESOP) has been the optimal legal mechanism for transferring ownership of stock to employees in the company in which they work. A primary goal of ESOPs is often long-term employee ownership, as an ongoing employee reward program that leads to improvements in productivity and profitability and helps to ensure the longevity of the company. Unfortunately, the laws applicable to ESOPs have not kept pace with evolving trust law. In particular, legislators have not adapted ESOP policy to states’ widespread reform of the rule against perpetuities. Even in states that have eliminated the rule against perpetuities, the “exclusive benefit” rule imposed by federal law requires ESOPs to prioritize employees’ retirement income at the expense of employees’ continued ownership of their business and thus prohibits a perpetual ESOP trust. As such, ESOPs are an w1certain vehicle when it comes to safeguarding the ownership of a firm by its employees.

The ESOP structure is also exceedingly complex, which warrants additional concern. This article discusses perpetuity and other related problems with ESOPs and introduces the employee ownership trust (EOT) as a viable alternative.