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The Employee Ownership Update

Corey Rosen

May 24, 1996

(Corey Rosen)

Republicans Attack ESOPs Again; President Reiterates Support

House Republicans have led an effort to repeal section 133 of the Internal Revenue Code, which allows lenders to exclude 50% of the interest income they receive on loans to certain ESOPs owning over 50% of a company's shares.

Republicans originally included the repeal in the Budget Bill, which is now probably fatally languishing between the Congress and the President. Now they have attached it to a small business tax relief bill that passed the House May 22. The section 133 repeal would help pay for the new tax benefits.

Part of that small business bill makes changes in Subchapter S law. Initially, those changes would have included allowing ESOPs to own stock in Sub S companies, but the Republicans dropped that provision, one of only three of 23 provisions in the original bill they deleted.

Meanwhile, President Clinton has directed the Labor Department to look at ways to encourage employee ownership and participation as part of his "corporate responsibility" initiative. He also reiterated his opposition to dropping section 133.

Prospects for the Republican proposal are uncertain. The tax bill would probably pass the Senate, but is tied up in complex politics and might not ever reach the President, who might veto it if it does.

Employee Ownership Index Stocks Still Beating Averages

An index on public companies with more than 10% employee ownership continues to outperform broad market indices. Weighting each company equally (which is how most people would make investments), the index has grown 84% between 1992 and 1995, compared to 59% for the Dow and 52% for the S&P 500. The index is compiled by American Capital Strategies.

New Ruling Could Change Definition of Fiduciaries

A new Supreme Court ruling (Varity v. Howard, 3/19/96) could have a significant effect on all employee benefit plans. The case, which did not involve an ESOP, involved plans by the Varity Corporation to spin off some of its businesses. The company told employees about future benefits under the spin-off to encourage employees to be transferred. Some of the information was substantially wrong; the spin-off subsequently folded.

Employees sued, and the court ruled the company was acting as a fiduciary in providing the information, even though the communications were not part of official plan documents. Courts have been split in the past on whether promises by a company relative to a benefit plan are fiduciary issues. Moreover, the court allowed individual employees to sue; in the past, plan participants had to seek plan-wide redress. Consultants are split on whether these conclusions break new grounds, but some view it as one of the most significant cases in recent years.
Volunteer Executives Needed for Hungarian ESOP Firms

The International Executive Service Corps is looking for volunteer executives to consult with employee ownership companies in Hungary. Interested individuals should contact James Leet at the Corps at POB 10005, Stamford, CT 06904, or Pete Lucas, former president of employee-owned Flight Structures, at 205-455-5506.

How Much Employee Ownership Is There in China?

First-hand reports from China reach different conclusions about just how much employee ownership there really is in that country. Township and village enterprises (TVEs) make up most of all but the very largest companies in the country (most of the largest ones are owned by the central government). According to some reports, most TVEs have been or are being sold to worker-owned cooperatives. Other observers, however, say that these sales are only beginning, and still experimental. Still, everyone agrees that this seems the most likely course for the TVEs in the next several years. Laws are now being drafted to help govern the transition. Meanwhile, the state-owned enterprises may start selling some of their shares to employees.

Author biography and other columns in this series

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