Permits eligible employee stock ownership plans to own shares in professional corporations

Title of bill

An act to amend the business corporation law, in relation to professional service corporations

Purpose or general idea of bill

This bill would simplify the process by which professional service corporations may establish Employee Stock Ownership Plans (ESOPs). In particular, it would allow ESOPs to own shares of a professional service corporation.

Summary of specific provisions

Section 1 adds a new paragraph to Section 1501 of the business corporation law, authorizing professional service corporations to create "eligible employee stock ownership plans." Under the definition created by this legislation, all voting trustees of such ESOPs must be individuals who are authorized to practice the professional service that such a corporation provides. However, if a conflict of interest exists for one or more of the trustees with respect to a particular issue or transaction; then, the trustees may appoint an independent trustee or special fiduciary who is not authorized to practice that particular professional service. Further, under such ESOPs authorized by this bill, no shares, rights, or options to purchase shares of the corporation may be transferred to anyone who is not authorized by law to provide such a professional service, unless such shares are subject to immediate repurchase by the ESOP.

Section 2 allows professional service corporations to issues shares to ESOPs authorized by this legislation.

Section 3 allows shareholders of a professional service corporation to sell or transfer his/her shares to an ESOP.

Section 4 amends the definition of a foreign professional service corporation to include the trustees of an eligible ESOP.

Section 5 requires that the annual statements of foreign professional service corporations include the name and address of all trustees of the eligible ESOP.

Justification

Nationally and in New York, entrepreneurs born between 1946 and 1964, the largest group of entrepreneurs in the population, are beginning to sell their businesses in order to provide for themselves and their families in retirement.

Sale to an Employee Stock Ownership Plan (ESOP) is one important succession strategy that enables entrepreneurs to transfer their businesses to an ERISA regulated retirement plan for the benefit of their employees. Sale to an ESOP is an alternative to a sale to a competitor who may close or consolidate the business and eliminate New York jobs.

Under the current Business Corporation Law, ownership of shares of a professional service corporation is restricted to individuals who are licensed to practice the applicable profession. This restriction on ownership prevents an ESOP from owning shares in a professional service corporation directly. Under current law, if a New York professional entrepreneur wants to establish an ESOP to provide for his or her retirement and protect employees' jobs, the professional service corporation must engage in complex and expensive corporate structuring that often acts as a deterrent to establishing the ESOP.

This bill would make it easier for professional service corporations to establish ESOPs by explicitly allowing ESOPs to own shares of a professional service corporation. In addition, to protect the professional, regulatory and ethical integrity of the professional service corporation, the bill would require that the operating ESOP trustee, as legal owner of the shares, be an appropriately licensed professional.

Prior legislative history

New legislation.

Fiscal implications

None.

Effective date

Immediately.