The Employee Ownership Update
February 23, 1996
Employee-Owned Journal Communications Rejects Takeover BidJournal Communications is one of the largest employee-owned firms, and the largest in the communications industry. Majority employee-owned for over 50 years, it employs about 6,000 people. It publishes the Milwaukee Journal-Sentinel and has several subsidiaries in various media fields. About 2,700 employees own and vote stock that they become eligible to purchase after meeting seniority requirements. The employees own 90% of the company.
A New York firm, Sextant Partners, has offered to buy the company for twice its current market value, but the company's chairman rejected the offer. Sextant now hopes to go directly to the shareholders, but employees have told reporters there is little interest. Most believe their jobs and their retirement interests are better served by staying employee owned, a belief fueled in part by the consistently good performance of the company's stock. To acquire the company, Sextant would need a two-thirds vote from the owners, but even then those not voting to sell would have the right to buy stock from those who do want to sell at the previously appraised value, not the Sextant offer price.
Labor Department Says Pretax Salary Contributions to Repay ESOP Loans InappropriateOn October 13, 1994, the IRS issued a technical advice memorandum (TAM 95030002) saying that employees could make voluntary pretax contributions to their ESOP or ESOP/401(k) plans to help pay off an ESOP loan. An employee, for instance, might defer 2% of pay to help pay off the loan, receiving an equivalent value in company shares above what would otherwise be contributed. While the IRS thought this was fine, in a January 16, 1996 letter to the IRS, the Department of Labor (DOL) disagreed. The DOL argued that "the use of participant contributions to repay the exempt [ESOP] loan...serves directly to relieve the employer of its obligation to contribute to the plan." The DOL also contended the participant would forego other investment opportunities that might be better.
ESOP consultants have argued that the DOL position precludes employees from making a purely voluntary choice. As long as there is no coercion, and the employee is provided with appropriate information concerning the risks of the decision involved, there should not be a problem. In its letter, the DOL is asking the IRS to change its position; if it does not do so, the TAM would stand and, presumably, companies could continue to allow such contributions.
Section 133 UpdateThe ability of lenders to exclude 50% of the interest income they receive on ESOP loans remains up in the air. When Congress passed the Budget Reconciliation Act, this provision was eliminated, but President Clinton vetoed the bill and it remains in much-discussed limbo. The "section 133" provision is retroactive to the date Congress passed the bill, however, so any company using that provision runs the risk of having the tax benefit retroactively removed. On the other hand, if there is no budget agreement, an increasingly likely scenario, then the bill will die, and a new Congress would have to start all over again.
Author biography and other columns in this series