The US House of Representatives passed the Main Street Employee Ownership Act (H.R. 5236) on May 8. The bill would be instrumental in facilitating the establishment of employee stock ownership plans (ESOPs) by revamping the rules by which the Small Business Administration (SBA) must abide when assisting small employers interested in transitioning to an employee-owned model. Specifically, it (1) allows the SBA to make loans to companies that can then reloan to ESOPs (prior law only allowed loans made directly to ESOPs), (2) allows ESOP loans to be made under the SBA's preferred lender program (a program providing for expediting the processing of loans with cooperating private lenders), and (3) updates the definition of ESOPs in the current law governing SBA loans so that ESOPs do not need to have full voting rights to qualify.
The bill also makes an exception to an SBA rule that sellers of a company cannot have an ongoing role in the firm. It waives a current SBA requirement for a 10% equity investment in a business transition loan, and it allows financing to be used to cover transaction costs.
Finally, it requires the SBA to coordinate with investment funds licensed through the SBA's Small Business Investment Company Program and intermediary lenders through SBA's Microloan Program to promote employee ownership as an area to consider for investment and lending. It also directs Small Business Development Centers to provide outreach and training on ESOPs, and it directs the SBA to set up an interagency task force to develop further recommendations for promoting employee ownership.
The bill has been introduced in the Senate (S. 2786), and its prospects for Senate passage are good. If passed, it would provide $500 million in support of ESOP programs, and would be the first federal ESOP legislation passed since 2001, when Congress enacted rules to prevent the abuse of S corporation ESOPs.
There has been a lot of pro-ESOP legislation action taking place lately at both federal and state levels. Recognizing that employee ownership increases company productivity, employee morale, and profits, politicians on both sides of the aisle are showing their support for employee ownership through their efforts to get these types of bills passed. This is a great sign for the future of ESOPs.
If you have any questions about the ESOP legislation currently moving through Congress or ESOPs more generally, please reach out to the authors or your Morgan Lewis contact.