What issues arise if matching contibutions to a 401(k) plan are made in a company's publicly traded stock; and this portion of a plan is chacterized as an ESOP, and the employer decides to allow all participants to diversify out of employer stock and into the other plan investment options?

Was the stock that was contributed to the plan registered with the SEC?

Yes, the stock is registered with the SEC.

Realize that

• There is still no ERISA 404© protection for money originally placed in company stock as a default.
• Plan fiduciaries can still be sued claiming that the stock isn't a prudent investment.
• You might need to adjust what portion of the plan is designated to be an ESOP. One can argue that matching contributions as a whole are no longer designed to be primarily invested in employer stock.

Lots of companies have done what you suggested but it's not at all clear that this action actually addresses any of the potential liability of having an employer stock fund in one's 401(k) plan.