Subpoena Issued for Zell and Chicago Tribune ESOP

Interesting news today, that the Chicago Tribune has received a Subpoena about their leveraged ESOP transaction in 2007.

This is interesting for a number of reasons.  First, depending on the Department of Labor's theory in the case, it could lead to a complete stoppage of these transactions.  Leveraged ESOP buyouts are a unique way to gain special tax treatment for buyers, avoiding unrelated business income tax in the business by forming an S Corporation and using the ESOP to buy the shares.  

However, an ESOP has a fiduciary duty to the plan particpants (employees who own the company). Thus, any activity that leads to destruction of their equity, has the potential to lead to an array of lawsuits.  Interesting here is the DOL's issuance of subpoenas.  This could mean that the DOL is going to pubicly make a statement with their position and potentially file a lawsuit against Sam Zell and the Tribune ESOP.  The basis of the lawsuit would be a violation of ERISA fiduciary duties.  

Second, this could lead to future legislation or court precedent that could again end the use of this sort of transaction in buyouts.  

Third, if the Tribune is successful defending a potential lawsuit, this could increase the use of S Corp ESOP transactions, especially with public companies.