National Forge: Full Case Study

National Forge Company
Contract ESOP with Formula Vote for Union
Ended by premature sale of management sharesThe Employee Stock Ownership Plan (ESOP) at National Forge was a contract ESOP with a formula vote and not a traditional leveraged ESOP.The National Forge ESOP acquired its 63.5% interest in the company over a period of 5-7 years but the ESOP participants stock had a special formula vote giving participants 63.5% of the voting rights prior to their acquisition of that stock.National Forge Company, located in Irvine, Pennsylvania, was a leading manufacturer of very large precision machined forging, and a market leader in the crankshaft, pipe mold, and defense markets. Founded in 1915 by Clinton Wilder, it continued under the Wilder family ownership until June of 1995. In May of 1994, the Wilder family provided the National Forge employees with an opportunity to make a bid for the Company.In June of 1995, 676 employees of National Forge Company purchased the 80 year old family-owned business utilizing an ESOP. Approximately 550 of them are represented by the Independent Union of National Forge Employees (IUNFE).An employee buyout committee comprised of senior management, salaried employees, and representatives of the IUNFE led the transaction. The IUNFE retained Deborah Groban Olson as counsel to represent them in negotiations with the Wilder family, the lenders, and management.A consortium of lenders led by Chemical Bank provided financing. Senior management provided initial cash equity via private placement. The seller also maintains a small continuing interest in the business.The National Forge employees agreed to a 10% wage and benefit reduction in order to facilitate the buyout. These reductions were offset with a new profit-sharing plan plus the ESOP shares. The company’s board of directors included hourly employees and IUNFE representatives, as well as senior management and outside directors, chosen jointly by labor and management.The successful purchase of National Forge Company by its own employees allowed the Wilder family to retire from management of the company, obtaining a tax deferral on the capital gains, while still retaining a small interest, kept the jobs and wealth generated by National Forge in the Irvine community for a few years, and gave the National Forge employees a voice and financial interest in the continued growth and prosperity of National Forge. It created a new voice for all employees and the IUNFE in making corporate decisions.However, when the management had the company buy back all their stock upon converting to an S corporation, the cash flow strain led to bankruptcy for National Forge. National Forge was reopened in Irvine, PA in 2005 after its assets were purchased out of bankruptcy by the Ellwood Group in 2003.