Bret Keisling is joined by Mark Kossow, Esq., of Clark Hill PLC to discuss some of the reasons why ESOP transactions need to be paused during the Coronavirus emergency. Hints: Uncertainty is bad, running afoul of the Department of Labor (DoL) is worse.
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To hear more about Mark Kossow, listen to Mini-cast 19: Mark Kossow joins Clark Hill.
Mini-cast 75 Transcript
Announcer: 00:03 Welcome to The ESOP Mini-cast, a great way to wrap up the week.
Bret Keisling: 00:15 Hello, my friends. Thank you for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. As we're publishing this episode on March 27th, everyone at The KEISOP Group wishes you well and hopes that you're maintaining yourself through the coronavirus national emergency as well as you possibly can.
Bret Keisling: 00:36 In today's episode, I'm going to be joined by Mark Kossow, Esquire. He's a partner at Clark Hill, a national law firm. Mark has been doing ESOP law for about 15 years. I've worked with him on a number of transactions. Mark actually was the lawyer involved in my very first transaction. He's a very talented, talented ESOP lawyer and I wanted him to come on and discuss some of the legal issues he's facing right now during the coronavirus emergency. Next Tuesday, on Episode 106 of the primary EO/ESOP Podcast, we're going to release the full conversation with Mark Kossow. We'll cover more issues than we have today. But for today, Mark's going to raise some important issues to consider and explain why ESOP transactions generally speaking should be paused right now 'til we get more information. Without further ado, here's Mark Kossow.
Mark Kossow: 01:36 I think that the hot topic these days is trying to find a path forward in current ESOP transactions. And I think they're two different buckets if you will. You have to bifurcate the transactions. One bucket deals with deals that the term sheet, the letter of intent has already been negotiated and now we're in the production of the transaction document phase. What do we do now that the deal has been negotiated but has not closed yet? And I think in those circumstances there's three different approaches and they're not mutually exclusive. You can combine these options. The first option obviously would be to renegotiate a purchase price and, you know, based on the uncertainty, the fluctuations in the marketplace I think renegotiating purchase price would be a reasonable approach in these days, even if you have a signed and executed a letter of intent.
Mark Kossow: 02:43 Another thought would be for the trustee and the company to take a pause to take a moratorium, if you will, for 30, 60 days. Just a timeout, just to see where the markets and the uncertainty down and see if we can move forward in a month or two. And again, these are not mutually exclusive. So you take a 30 day time out and everyone wants to move forward. Well, things might have changed drastically in 30 days where a renegotiation of the purchase price would be warranted as well. And the third option would be to perhaps negotiate a clawback provision in the document where if the company fails to meet certain target EBITDA requirements over two or three year period, you would effectively clawback the purchase price, reduce the seller notes and, you know, for example, you've got the 10% reduction on purchase price if you've missed the mark by significant variable. And again, that's not mutually exclusive. So you can renegotiate purchase price, introduce a call back, take a 30 day timeout, you can do everything. And there's no one right way to, to deal with this situation.
Bret Keisling: 04:03 For me, I'd be thinking in terms of pausing with a time to revisit the issue. And what I mean by that is, as you're aware, as we're recording this on a Thursday, March 26th, President Trump is indicating he'd like the country to be reopened for business by Easter. Well the fact of the matter is, if we were sitting here today on March 26th saying the company's going to be reopened for business on Easter, hat's one set of facts. On the other hand, we don't really know that today, right?
Mark Kossow: 04:37 Absolutely not. And I think that's pure speculation at this point in time that the country, quote unquote, is going to be reopened by Easter. I think you've got to follow science and you've got to follow the damage that the virus is doing around the country before you even think about lifting these, stay at home orders for the various states and try to reopen or reinvigorate the economy. So, you know, and it all goes back to the uncertainty where we sit today. There's so much volatility in the stock market. There's so much uncertainty in terms of the labor markets and the viability of various companies. Obviously some industries are not impacted unlike others. For example, supermarkets, they're doing fantastic, at least in the short run. People are buying up groceries, like they're going out of style. So, but other industries such as the jewelry business for example, may not be doing very well at this point in time. So it's industry by industry specific and that may be a key driver for what tactic, what strategy you utilize. And I think a 30 day pause for most industries is probably a very good idea, at least in today's environment.
Bret Keisling: 06:05 Looking at that again, Mark is the 30 days not as - and we used to go through this as, you know, in as average transactions would come close to, you know, closing time - we'd say, well, maybe the closings in a couple of weeks, you know, there'd be a little bit of, of when all the work is done, but at the very least the pause - and it's managing expectations. You want to do the transaction right. But would you agree, Mark, the fundamental concern is nobody wants, nobody in ESOP world, wants a repeat of what happened in the 2008 recession where the pause needs to happen so that people don't rush through allowing three or four or five years down the road, the DoL to say, Hey, you shouldn't have done that. And suddenly we have all kinds of regulatory stuff because people did not pause. Is that part of your concern?
Mark Kossow: 06:55 That's exactly right. That's a very, very valid concern. We don't want to, you know, we know the DoL looks at deals in hindsight, which is always 20/20 vision. We don't have the luxury of hindsight, we're going through it today, but with, with the eye on potential DoL criticisms, you know, years down the road, 30 day pause makes a lot of sense to just take a breather and see where the markets are going and see how the businesses is doing, holding up and just see, see if there's less uncertainty in a month from now than it is today.
Mark Kossow: 07:34 And I want to introduce one more concept and that really comes into play with new deals that just got started the last week or two. There's another workaround that I'm, that I'm seeing some companies gravitate towards and that is negotiating all of the non purchase price deal terms and leave the purchase price bracketed with the full understanding that as we move through the transaction, as we do our due diligence, as we get ready to close, we will revisit the purchase price. And maybe at that point in time we will introduce a clawback or we'll do other mechanisms to ensure that the purchase prices is well justified. By doing that you see a path forward and you have momentum and you keep the deal moving in the right direction.
And I want to introduce one more concept and that really comes into play with new deals that just got started the last week or two. There's another workaround that I'm, that I'm seeing some companies gravitate towards and that is negotiating all of the non purchase price deal terms and leave the purchase price bracketed with the full understanding that as we move through the transaction, as we do our due diligence, as we get ready to close, we will revisit the purchase price. And maybe at that point in time we will introduce a claw back or we'll do other mechanisms to ensure that the purchase prices is well justified. By doing that you see a path forward and you have momentum and you keep the deal moving in the right direction.
Bret Keisling: 08:35 Okay. My friends, there is plenty more of Mark Kossow you'll be able to hear next week on The EO/ESOP Podcast. But in the meantime, thank you so much for joining us today. If you have questions, if you have anything you'd like us to discuss regarding ESOPs or employee ownership, co-ops, collectives, you'll get information on how to reach us in just a moment. With that folks, these are scary times for everybody in the country, uncertainty and a lot of concern going on. Take care of yourself, take care of those around you and just have faith that we're going to get through this together. I hope you have a great day. A great weekend ahead. Thanks again for listening. I'm Bret Keisling.
Bitsy McCann: 09:18 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.
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