Blackwell Reference Online

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Employee Stock Ownership Plans (ESOPs) are defined contribution pension plans that have two distinctive features: (1) they can be leveraged (though they need not be), and (2) they are designed to primarily hold the sponsoring firm's equity securities. In contrast, other pension plans typically are restricted from borrowing to acquire the securities for the plan and by law must be diversified with respect to their investment holdings. The stock held in an ESOP, usually common or convertible preferred stock, can be repurchased from the firm's outstanding shares or be newly issued treasury shares. In either case, the shares are considered outstanding and therefore have cash flow and voting rights. Because of the ability of an ESOP to be leveraged, a firm can quickly place a large block of shares in the plan. This ability has raised questions about whether ESOPs can be used as anti‐takeover devices in control contests by management to help fend off unwanted bids. However, as pension plans, there is a high degree of oversight and a number of regulations that affect how the plans can be used. At the initiation of a leveraged ESOP, most shares are placed in a suspense account; these shares are called unallocated shares . As the ESOP loan is repaid, shares are allocated to individual employee accounts, and the employees receive the associated voting rights. Non‐voting securities used to ... log in or subscribe to read full text