It would be quite disturbing to a person to wake up, look in the mirror and see the reflection of someone else. However, this is what happens when a leveraging transaction is set up, expected to be a mirror note, but the provisions of the note are not at all identical. You might be thinking that this is ludicrous, how could this happen to an ESOP? The answer is a lot more common than you would think. Understanding the ESOP loan is extremely important and vital to maintaining a compliant Plan.
It is very common for an ESOP to purchase shares through a leveraged transaction. It is also very common to see a two part transaction agreement between three entities: the Company, the ESOP and a financial institution. In stage one, a financial institution will lend the money to purchase the ESOP shares to the Company with a loan agreement, from this point on referred to as the External Note (aka Company Note). The second stage is the loan agreement between the Company and the ESOP to purchase the shares, from this point on known as the Internal Note (aka ESOP Note). In this scenario you have two separate loan agreements. When the provisions of the loan agreements are exactly identical, you have what is called a mirror note.