Two Recent Employer Securities Court Cases
July 30, 2007

The Courts Address Rights Relating to Employer Stock discusses two court cases that impact plans that hold employer securities:

• Goodin v. Innovative Technical Solutions, Inc., 2007 U.S. Dist. LEXIS 31320 (D.C. Haw. 2007)
  
  This case "ruled that an employer violated the anticutback rules by eliminating 401(k) participants' rights to receive a put option with respect to inkind distributions of privately held stock…. Accordingly, the court found that the put option right was an optional form of benefit because it is a factor that affects the value of the benefit form, and that eliminating the put option denied the participants a cash market for their stock distribution."
  
  
• Ward v. Avaya, Inc., 2007 U.S. Dist. LEXIS 27568 (D.C.N.J 2007)
  
  This case "reviewed a plan fiduciary's decision to (i) continue to offer employer stock as an investment option under the plan and (ii) continue to allow plan assets to remain invested in employer stock in the face of falling stock prices. Based on the fact that the plans in question were required, by the express terms of the plan document, to offer the employer common stock as an investment option, the court reviewed the complaint using an abuse of discretion standard of review and held that a decline in stock value, without more, is not sufficient to prove an abuse of discretion….the court applied the deferential standard afforded a fiduciary of an ESOP as established in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Under this standard, an ESOP fiduciary who invests plan assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. This has become known as the "Moench Presumption," More discussion on this case can be found here.
  
  We have previously discussed stock drop litigation here. If you are looking for more information on the Moench Presumption and stock drops, here are some lengthy articles:
  
  WHAT'S UP ON STOCK-DROPS? MOENCH REVISITED
  
  
  REEXAMINING MOENCH -- WHEN MUST A FIDUCIARY SELL EMPLOYER STOCK?
  

ESOPs in the Missouri/Kansas Region
July 26, 2007

The Kansas City Star has an article about the high number of ESOPs in the Kansas City area. It discusses how 11 companies on The Employee Ownership 100 are based in the Missouri/Kansas area, and another 18 have significant operations in the area.

"Kansas City area's biggest employee-owned companies

• Black & Veatch — Kansas City — engineering — 8,500 employees
  
• Performance Contracting Group — Lenexa — specialty contractor — 5,700 employees
  
• Ferrellgas Partners — Liberty — propane distribution — 3,750 employees
  
• HNTB — Kansas City — architecture and engineering — 3,100 employees
  
• Terracon — Lenexa — engineering and consulting — 2,715 employees
  
• Burns & McDonnell Engineering — Kansas City — architecture and engineering — 2,400 employees"
  

This is not the first story that the Kansas City Star has published on this topic. Employee ownership expands was published on November 14, 2006, and was another positive piece about the ESOPs in the area. In addition to the ESOPs mentioned above, it also discussed ESOP companies such as MMC Corp, PBI/Gordon Corp., and USA 800.

Benefits and Disadvantages of ESOPs
July 23, 2007

This article discusses ESOPs as internal buyers of company stock and describes the following ESOP benefits:

• "Tax-deferral of Capital Gains"
  
  
• "Non-cash Tax Deductions for the Company"
  
• "Diversification for the Business Owner While Maintaining Control"
  
• "Possibility that the employees will appreciate the value of their productivity and change their behavior on the job."
  

It also states that the, "primary disadvantages of ESOPs are the initial set up costs and the [often times] use of leverage in financing the ESOP."

The article summarizes the benefits of an ESOP as follows:

"So, for a 'controlled' and 'partial' monetization strategy from a business, an ESOP can be just the right fit for a business owner looking for personal diversification, but not quite ready to give up control of the Company."

ESOP Tax Cost Projection

We previously discussed the ESOP Tax Cost Projection. This blog post also discusses the topic.

ESOP Tax Cost Projection/Possibility of a Dow Jones ESOP
July 16, 2007

The Employee Ownership Update for July 16, 2007 is now online, covering the following items:

• ESOP Tax Cost Projected at $1.89 Billion
  
• SEC Proposes Not to Count Options for 500-Shareholder Rule
  
• An ESOP for Dow Jones?
  
• Employee Ownership Effort in Bangladesh
  
• South Africa Continues to Move Forward on Employee Ownership
  

The Update notes that the Office of Management and Budget (OMB) lists the ESOP tax benefits projection at $1.89 billion for 2007 (and $2.67 billion for 2012), and compares the projection to that of reimbursed employee parking expenses, 401(k) plans, and IRAs. The Update also suggests that the ESOP benefit is actually a deferral of the tax rather than a non-taxable item:

"OMB estimates calculate the non-taxability of the ESOP's share of corporate profits as a tax cost, although, arguably, it is actually only a deferral of tax that will be paid when employees receive distributions."

The Update also discusses the possibility of using an ESOP as part of the purchase of Dow Jones Company. We previously discussed this story here.

In The News: Sharing Ownership and Creating a Market / Producing a Competitive Advantage / Leaving a Legacy
July 11, 2007

This press release announces that Environmental Liability Management, Inc. (ELM), a 50-employee environmental engineering and consulting firm headquartered in Princeton, NJ, sold their first block of stock to an ESOP on June 22, 2007:

"The Plan has two objectives," Mr. Fallon indicated. "First, to reward all employees by giving them an opportunity to share in company ownership, and secondly to create a market for stock held by present owners without having to go to outside interests." "The result of the Plan," he continued, "should also increase employee incentives to maintain quality and increase productivity, as well as help retain people and provide them with long-term retirement benefits."

This article talks about "the 13th-biggest private company in Greater Cincinnati and Northern Kentucky", 100% employee-owned Messer Construction Co. The ESOP includes about 400 of Messer's 900 employees.

"Bob Wehling, the retired Procter & Gamble Co. executive who is a member of Messer's board of directors, calls the ESOP and the culture it has produced a competitive advantage. "There's a pride in working there," Wehling says. "And they give a lot of responsibility to younger people. That attracts a lot of the best engineering talent."

Strange says the company has found its market niche, which once included a far-flung network but now has consolidated to eight offices, with Nashville the most remote from Cincinnati.

And to him, that market niche includes much more than clients and profit margins.

"This was an industry that traditionally treated human beings like a commodity: Hire them when you like, fire them when you like," he says. "We wanted to own the right to have our voices heard. This notion that individual employees can have a voice is something that is so powerful.""

This article discusses the Garden State Mortgage ESOP, which is one of the first mortgage lender-broker ESOPs:

"Aranda, a Wisconsin farmer's son who founded the company in 1991, saw the move as a way to divest himself. But he also had higher motives.

"I like that it's very egalitarian," said the 48-year-old Leonia resident and president of the lender. "I thought it was a very healthy way to run a company, where people can feel they're rewarded commensurate with their participation. The best legacy would be for me to leave the company to its employees.""

Benefits of Implementing an ESOP
July 10, 2007

This article discusses some of the benefits of implementing an ESOP:

"ESOPs put the ownership of a business in the hands of the employees and offer a variety of benefits, some of which include:

• Provide an option for someone looking to transition out of their business. Adkins said the ESOP is the legal shareholder or owning entity who will have the voting ownership of the stock offered.
  The day-to-day ongoing business and the running of the business normally stay the same.
  
• Allows business owners seeking to sell a chance to gain liquidity or convert the value of the business to cash while allowing owners to retain substantial control.
  
• Enables business owners to sell company at current fair market value.
  
• Allows a structured manner where proceeds can be obtained by selling to shareholders without paying capital gains taxes as allowed in IRS code 1042.
  
• ESOPs can be a company's development and growth strategy because of the tax incentives, which will allow the company to deal with certain transactions without paying taxes.
  

A way to tie key employees to the company as a incentive and motivator.
It also can help preserve a company's legacy and business owner's permanent succession plan, according to UBS."

A blog post entitled Employee ownership on the rise discusses the increase in the number of ESOP companies, the benefits of employee ownership, and the issue of retirement diversification:

"According to the article, a current project is aimed at looking more in depth at the problems with ESOPs, including the phenomenon called "shirking" (not all employees carry their weight equally) and the financial problem of lack of diversity of investments for those employees in an ESOP. However, using data from the Shared Capitalism project in a paper for the annual conference of the Labor and Employment Relations Association the authors noted that "while far from adequate from the standpoint of financing retirement, the median pension wealth of ESOP participants is over four times higher than the median household pension wealth, and that company stock ownership in ESOPs, while highly concentrated, is considerably less concentrated than stock ownership.""

Stock Drop Litigation
July 2, 2007

The June 29 Employee Ownership Update is now online, discussing the following items:

• Stock Drop Lawsuits
  
• German Government Wants to Increase Employee Shareholding
  
• Large Companies Moving Toward Grant Date Closing Price as Exercise Price for Options
  
• New Booklet on Employee Owners in S ESOP Corporations
  
• Federal Reserve Article Takes Positive View of ESOPs
  
• Are You a "Best Place to Work" Small or Medium-Sized Company?
  

The Stock Drop Lawsuits section discusses the impact of 53 lawsuits filed since the late 1990s. Although the total judgments and settlements were almost $1.5 billion, if you do not consider the four significant cases (Enron, AOL, the Williams Company, and Royal Dutch Shell), "the average employee is receiving only several hundred dollars per settlement."

For more information about stock-drop litigation, check out this PowerPoint presentation.

I will have more information about the Federal Reserve article in a separate post.