The Employee Ownership Update
September 1, 1998
Employee Ownership Developments in RussiaIt has now been four years since the completion of the mass privatization in Russia, a transformation accomplished primarily through transferring shares to employees at little or no cost. Employees owned a majority of the shares in privatized companies in 1992, but, according to a forthcoming article in the NCEO's Journal of Employee Ownership Law and Finance written by Sergei Mitsek, dean of the commercial faculty at the Liberal Arts University in Yekaterinburg, that percentage is now under 40% and is falling quickly. Mitsek reports that employees, who can sell their shares freely, are often forced to do so because their employers are not paying them wages, often for months at a time. Managers continue to purchase shares to consolidate control, while outside investors are buying some companies. Companies often are diluting ownership by issuing new shares as well, sometimes to exchange for debt held by banks.
A new law is making its way through the Duma that would provide a legal structure that would encourage long-term employee ownership by limiting the amount individual employees could hold, giving the company a right of first refusal on share purchases, and allocating shares to new employees. Companies must have more than 50 employees, but not be publicly traded to qualify.
One Major ESOP Sells; Another StartsEmployee-owned Republic Engineered Steels has agreed to be purchased by Blackstone Capital Partners and Veritas Capital Partners in a $420 million transaction. Republic, which is listed on the NYSE, is 54% owned by an ESOP. Employees bought the company in 1989 from Republic-LTV to save it from closing. The company made considerable progress in its early years and was eventually able to go public, but it has been struggling in recent years, and its stock price has been stagnant. ESOP participants will have to vote on the offer, but the United Steelworkers, which organizes the employees at Republic, was very positive about the proposed transaction, seeing it as an opportunity to add much needed capital. Republic's stock rose 52% when news of the offer was made public. The future of the ESOP in the new company was not disclosed.
While Republic will likely now drop from the list of major employee-owned companies, another company is taking its place. In what appears to be the largest ESOP transaction in the last few years, an ESOP is buying 100% of Ferrellgas Partners LP. The company employs 4,500 people, serving 800,000 customers in 45 states with liquid propane. It is the second-largest company in its industry. It was principally owned by the Ferrell family, but was also traded on the NYSE. The company is profitable; the transition apparently was motivated by the family's desire to see the employee become owners. The ESOP borrowed $380 million for the transaction, with the money borrowed through private placement.
FASB Considering New Rules in Option RepricingThe Financial Accounting Standards Board (FASB) has tentatively decided to require companies to account for the value of stock option repricing on their income statements. In FASB 123, the accounting board told companies that they did not have to report the present value of options on their income statements, provided they put that information in a footnote. Instead, companies could follow the older APB 25 for their income statement presentation. That procedure said that fixed option plans (options that fix a grant price and do not make the exercise of the option subject to performance conditions other than normal vesting schedules) do not have to show up on the income statement, but that variable option plans (plans where the option price or the ability to exercise varies with the achievement of specified objectives) do have show up. FASB argues that repricing makes an option plan a variable plan. Companies would have to report the cost of the repricing (the old grant price minus the new grant price times the number of outstanding options to which the repricing applies) on their income statements.
Predictably, the proposal has generated a lot of response from companies and consultants who do not want the cost to show up, a cost that could be tens or hundreds of millions in some cases. The recent fall in stock prices could trigger a wave of repricings, according to some consultants. The proposal will now be available for comment. If adopted, it will not be effective, in all likelihood, until at least the year 2000.