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Employee Ownership and Current Events

ESOPs and employee ownership can and should be a bigger part of the national dialogue. On this page you will find the NCEO's perspective on current events and issues.

Nomination for Head of ESOP-Related Unit at DOL

October 11, 2017

As of October 12, The White House confirmed a story earlier reported by Politico (scroll down to "WH picks EBSA nominee") that the White House will nominate Preston Rutledge to be the new Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA), the post formerly held by Phyllis Borzi. EBSA has responsibility for employee benefit plans, including rulemaking, enforcement, and investigations. Rutledge is currently the senior tax and benefits counsel for the Senate Finance Committee, a position he has held since 2011. Before that, he worked in the Office of Chief Counsel at the IRS and in private legal practice, where he focused on employee benefits.

Rutledge has been in frequent contact with ESOP advocates, especially with regard to the Promotion and Expansion of Private Employee Ownership Act. In comments on his potential nomination, Employee-Owned S Corporations of America (ESCA) wrote, "Based on our experience with Rutledge, we think he generally will be supportive of ESOPs... Rutledge may be receptive to concerns from the ESOP community regarding DOL's aggressive investigatory and enforcement posture."

In a September 2017 (no exact date given) video interview with Cammack Retirement Group's Jeffrey Snyder, Rutledge says that "the primary obstacle to that group of workers that is still not covered by a retirement plan is employers not having a plan at work," and describes three ways the Senate Finance Committee sought to make defined contribution plans more effective: allowing annuitization of distributions, increasing enrollment, and increasing lifetime accumulation." Increasing the number of ESOPs clearly advances at least the third of those goals. (See recent research on the household net wealth and income of employee-owners at www.OwnershipEconomy.org.)

The White House has not confirmed this report, but if Rutledge is in fact the nominee, it is possible he could be confirmed by Thanksgiving.

DOL, First Bankers Trust Enter into Settlement Expanding Fiduciary Process Obligations

September 28, 2017

In Acosta v. First Bankers Tr. Servs., Inc., S.D.N.Y., No. 1:12-cv-08648-GBD, consent order and judgment, Sept. 21, 2017, the Department of Labor and First Bankers Trust Services (FBTS) have agreed to a fiduciary process for future ESOP transactions where FTSB serves as a fiduciary. The settlement provides guidance that may be useful to other fiduciaries involved with ESOPs.

The settlement stems from a lawsuit in 2016 (Perez v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD, [S.D.N.Y. Sept. 28, 2016]) in which a district court dismissed cross-motions from both sides in the case of Maran Inc., a company that experienced financial difficulties after it set up its ESOP. FirstBankers said it hired a qualified appraiser and relied on its report, but the court said both that that in itself was insufficient to lead to dismissal but also that the DOL needed to show that the facts of the appraisal process demonstrated a lack of good faith.

The DOL was concerned that the valuation firm had worked for the company before, that FTSB did not get information about a prior offer to sell the company, and that the appraisal agreement stipulated the appraiser could rely on the projections of a Maran officer. The DOL alleged FBTS failed to negotiate over the offer.

The ESOP purchased 49% of Maran for $70 million in 2006. By 2009, Wal-Mart, its primary customer, stopped buying from Maran, and the stock dropped to zero. Wal-Mart later renewed the contract, and the stock was valued at $8.3 million.

The settlement expands on the GreatBanc Trust Fiduciary Process Agreement by adding a number of requirements concerning:

We will explore this issue in more depth in the next newsletter for members (the Employee Ownership Report). Holland & Knight has provided a useful side-by-side comparison (PDF) of the settlement with the GreatBanc Agreement, as well as a narrative description.

Three Lessons from the Failure of Piggly Wiggly

June 23, 2017

A special report in the Post and Courier of Charleston, South Carolina, paints a detailed, loving, and profoundly sad story about the rise and demise of iconic employee-owned grocery store chain, Piggly Wiggly Carolina. The company grew for four decades under family ownership, and then prospered for 20 more years with a combination of family and employee ownership through an employee stock ownership plan (ESOP). But the company's fortune declined, in part due to decisions made by senior management that appear to have been mostly for their own benefit, and in 2017 ESOP participants received a letter stating that "the company has no positive value."

This story, beautifully written and researched by Tony Bartleme, a three-time Pulitzer finalists, is sad for the employee-owners of Piggly Wiggly Carolina and for the company's customers and communities, but what are the lessons for others? Here are three.

Most airplanes land safely, but every crash is a headline. Piggly Wiggly's failure hurt thousands of people; employee ownership benefits millions. Crash-and-burn disasters make good stories, but the data is clear that employee ownership is a good thing in the great majority of cases. Some data points:

Employee ownership should not be a company's only retirement plan. Having an ESOP as a sole retirement plan is a risky proposition, and fortunately, the vast majority of companies, including Piggly Wiggly, offer additional retirement plans. In fact, ESOP companies are more likely than the average company to have 401(k) plans, and they tend to contribute around twice as much per employee to retirement plans compared with non-ESOP companies.

Employee ownership does not solve all threats. Changes in the market and decisions by company management doomed Piggly Wiggly. Employee-owned companies outperform their peers on average, but no business can eliminate the threat of failure.

Whatever lessons you take from Piggly Wiggly, its history as laid out in Bertelme's article, is a penetrating glance into commerce and the lives of working people through most of the 20th and 21st centuries. In 1916, Clarence Saunders founded Piggly Wiggly—and delighted in the mysterious whimsy of its name—as part of a strategy to modernize grocery stores by allowing customers to browse the aisles and serve themselves. In 1947 Joseph Newton acquired the rights to the Piggly Wiggly stores in South Carolina, betting on another innovation: that rationalizing the distribution of groceries through large, carefully organized warehouses would drive down prices. "Mr. Joe" treated workers like family, and the company prospered.

Piggly Wiggly Carolina became employee-owned in 1985, and for 20 years employee ownership was a good thing for all involved. It grew to 110 stores and a number of related businesses, nearly $1 billion in revenue, and 4,500 ESOP participants. It distributed an average of $1.6 million per year to retirees between 2000 and 2005. Interestingly, another Piggly Wiggly chain, this one in Wisconsin, was sold to employees this May.

Piggly Wiggly Carolina sought the mid-range grocery consumer, but found itself increasingly squeezed by low-cost retailers like Wal-Mart and by high-end stores like Whole Foods. In 2005, the ESOP acquired all the outside shares, and the company soon after went into a decline, with its stock dropping 36% over the next five years. Bertelme's article also describes how senior managers at Piggly Wiggly created a real estate development company that then leased space to Piggly Wiggly at rates well above this charged by other shopping malls, a significant factor in the company's problems. Litigation is pending over these and other ESOP issues.

In the face of their failure stands the success of the thousands of employee-owned in the United States and overseas, from those in grocery (like the 180,000-employee-owner Publix Super Markets) to craft beer (like New Belgium Brewing) to manufacturing (like Chicago's S&C Electric), to public relations (like upstate New York's Butler/Till), to residential care (like Wisconsin's Oconomowoc Residential Programs).

The Encouraging Employee Ownership Act Advances in Congress

March 15, 2017

On March 9, the Senate Banking Committee unanimously approved the Encouraging Employee Ownership Act (S. 488), a bill that would ease current Securities and Exchange Commission rules, making it easier for private companies to provide stock-based compensation to employees. The bill would increase to $20 million the current $5 million cap on the amount of stock closely held companies can award employees before triggering certain SEC reporting requirements. The amount would be indexed for inflation annually.

The bill passed the House last year, but was not acted on in the Senate. It has been reintroduced this year as H.R. 1343. Senators Warner (D-VA) and Toomey (R-PA) sponsored the Senate version, and Representative Randy Hultgren (R-IL) introduced the House bill.

Under Rule 701 of the Securities Act, offers to a company's employees, directors, general partners, trustees, officers, or certain consultants (those providing services to a company similar to what an employer might hire someone to do, but not consultants who help raise capital) can be made under a written compensation agreement. If total sales during a twelve-month period do not exceed the greater of:

then the offerings are exempt from registration requirements. The offerings must be discrete (not included in any other offer) and are still subject to disclosure requirements. For total sales under $5 million during a twelve-month period to the specified class of people above, companies must comply with anti-fraud disclosure rules; for sales of over this amount, companies must disclose additional information, including risk factors, copies of the plans under which the offerings are made, and certain financial statements. These disclosures must be made to all shareholders.

For purposes of this rule, options are considered part of the aggregate sales price, with the option price defined as of the date of grant. In calculating outstanding securities for the 15% rule, all currently exercisable or convertible options, warrants, rights, and other securities are counted.

Registration requires information disclosure comparable to what a public company must offer. The disclosures include information such as income statements, shareholder lists, and other sensitive financial data that most private companies do not want to provide. ESOPs are already exempt
from these rules because the ESOP is considered one shareholder, but companies with stock options, employee stock purchase plans, restricted stock awards, and similar plans all would be affected.

Wegmans, a large supermarket chain that regularly is listed as one of the of best companies to work for, has been actively promoting the act, arguing that disclosure requirements now in place for sales of over $5 million require private companies to make competitive information public. Wegmans has said it would start a plan if the bill is passed.

It is not clear how many companies are currently discouraged from broader offerings because of the current law. The $5 million limit was created in 1999, and there were no provisions for indexing.

Emma Peck of Engine, an organization that works on legislative issues for entrepreneurial companies, told participants at an NCEO meeting March 7 that the chances for passage were encouraging.

New Chair of DNC and Employee Ownership

March 1, 2017

On February 25, the Democratic Party elected Thomas Perez as the chairman of the Democratic National Committee. Perez is the former Obama Administration Secretary of Labor, and in that role he testified about ESOPs in Congress, advocating for them as a way to make sure that "we all succeed when we all succeed," and calling ESOPs "a very effective way of helping people, whether it's the cashier at the grocery store or the owner of the grocery store, giving them the opportunity not only to build a nest egg but [to have] skin in the game." He convened a meeting the same day to discuss ESOP, with participants including academics, organized labor, attorneys, company representatives, and nonprofits, including the NCEO.

A video of that testimony is available at esopinfo.org.

Trump's Labor Secretary Nominee Speaks of "Populist" Economic Plan

December 9, 2016

Andrew Puzder, CEO of CKE Restaurants and Donald Trump's nominee for Secretary of Labor, spoke on President-elect Trump's economic plan in a blog post right before the election. He characterized the proposed policies as being "populist" and aimed at "reducing income inequality... and opening paths to the middle class."

A conservative populist economic plan can best open paths to the middle class by using a time-tested, pro-market approach: employee ownership. Rock-solid data shows that companies owned by their employees are more productive, generate wealth for members of the working class, and generate more employment. Mr. Puzder may already be aware of this proven track record — employee ownership was mentioned favorably in the book on job creation that he co-authored in 2010 and CKE Restaurants offers an employee stock purchase plan as part of their benefits package.

Employee ownership is economic populism. People who are angry at the concentration of elite power will recognize employee ownership as a way to shift the economy toward the middle class. Communities that have seen jobs slip away can use employee ownership to root economic activity locally. People who feel themselves to be disempowered cogs in an impersonal economic machine can learn how business works and, together with their co-workers, take responsibility for their own economic futures.

The Department of Labor has regulatory responsibility for employee stock ownership plans, the main form of employee ownership in the United States, and Mr. Puzder can advance the values he and President-elect Trump have advocated by reducing barriers that prevent more Americans from having an ownership stake in the business where they work.