The Employee Ownership Update
May 16, 1995
ESOP Company Allowed to Use Dividends on Previously Acquired Stock to Pay Back LoanIt is clear that a company can use dividends paid on ESOP shares acquired by a qualifying ESOP loan to repay that loan. But what about dividends from stock previously acquired by the ESOP? According to IRS Technical Advice Memorandum 9516003, a company can use these dividends. In 1989, Congress passed a law saying that dividends from shares not acquired by the loan could not be used to repay that loan, but exempted stock acquired prior to 1989. In this memorandum, the IRS approved a plan that met these guidelines. The ruling is more surprising than it might seem at first glance, because in the past the IRS has indicated it would not issue rulings on this subject. Many ESOP advisors believe that to use the dividends on previously acquired shares for a future loan is taking benefits away from participants. Even though Congress may have limited the prohibition on such payments on stock acquired after August 5, 1989, it did not specifically allow dividends to be used this way for previous shares.
Employees Sue UnitedA $1 billion class action suit has been filed by several United Airlines employees who contend the ESOP overpaid for the shares (Summers v. State Street Bank). The suit alleges that true value of the shares was $88, not $198, the price assumed in valuing the concessions made by employees.
Republic Engineered Steels to Go PublicRepublic Engineered Steels, one of the nation's largest majority employee owned firms, will soon do a public offering. The 5,000-employee company was saved from closing by an employee buyout and has since returned to profitability on an operating basis.
$60,000 Stock Certificate Framed, Not SoldThe difficulty of explaining stock ownership to employees was driven home recently by Steven Lear, who oversees the ESOP at U.S. Sugar, a majority employee owned company and one of the largest sugar processors in the world. An employee left with a $60,000 account balance. He received a stock certificate with an explanation of how to sell it back to the company. When the period during which he could sell it expired, the company sent representatives to his house to figure out why he hadn't sold. He showed them the framed certificate and told them he thought it was just a certificate of appreciation. They explained to him that it was actually worth $60,000 and that he should sell it back to the company.
Malaysia to Hold Conference on Employee OwnershipMalaysia, one of the Southeast Asia's fastest-growing economies, will hold a conference on employee ownership in late August. The conference will explore the growing use of employee ownership in the country, occurring primarily through share purchase programs.
Chinese Delegation to Visit U.S.A group of high-ranking Chinese officials from the state privatization council will visit the U.S. in July to learn more about employee ownership. The visit is additional evidence of the growing interest in the concept as part of the partial privatization of Chinese state owned companies now being considered.
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