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The Employee Ownership Update

Corey Rosen

January 10, 1996

(Corey Rosen)

Employees Buy Major Canadian Trucking Company

The 2,700 employees of Canadian Pacific Express have purchased the company from Canadian Pacific Corporation and changed its name to Interlink Freight Systems. The company had been a subsidiary of Canadian Pacific. It had been losing money in the deregulated Canadian trucking environment, and Canadian Pacific put it up for sale. No buyers were found, however, until employees offered to buy the firm. Employees agreed to a three-year wage freeze and benefit reductions in exchange for about 700 shares (currently worth $1400) per year over the next five years. For 1995, it appears the company will break even. Interlink becomes the second largest majority employee-owned Canadian firm, behind the 4,000-employee Algoma Steel.

Clinton Budget Proposal Does Not Include Section 133 Repeal

The Administration's proposed budget does not include repeal of section 133 of the Internal Revenue Code. Section 133 allows commercial lenders to deduct 50% on the interest income they receive on loans to majority ESOPs that pass through full voting rights. The repeal is included in the budget passed by Congress. The fate of the proposal now hangs on the broader budget negotiations currently underway.

Changing Distribution Timing in ESOPs Does Not Violate "Anti-Cutback" Rules

Can a company change its distribution rules to pay people out later than initially promised and not face legal problems? According to a recent court case (Thomas Lee v. The Builders' Supply Co., 8:CV93-267, USDC NE), it can. The so-called "anti-cutback" rule of ERISA prohibits plan sponsors from reducing promised benefits to plan participants. A special ESOP exception, however, allows ESOPs to change distribution rules in a nondiscriminatory manner. In the case at issue, the Builders' Supply ESOP had initially been designed to pay out plan participants in cash upon termination. In 1989, the plan was amended to delay the payout for five years for people leaving for reasons other than for death, disability, or retirement. Payout would now be in the form of stock, with an installment payout for the put option to be paid over five years. Because the plan applies in the same way to all participants, rather than favoring one class over another, the court ruled the change was acceptable.

New ESOP Legislation Introduced in House of Representatives

New legislation has been introduced by House members Cass Ballenger (R-NC), Lewis Payne (D-VA), and Dana Rohrabacher (R-CA) to provide that Subchapter S companies could set up ESOPs. The bill would also exempt ESOP dividend payments from the Alternative Minimum Tax, allow people who acquire shares under options or other benefit arrangements to take advantage of special tax deferral rules for subsequent sales of the stock to an ESOP, allow worker cooperatives to take advantage of section 133 loans, and provide limited additional benefits for estates and charitable trusts selling to ESOPs. The legislation has not been introduced in the Senate. Similar legislation has been introduced the last several years, but no action has been taken.

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