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The Employee Ownership Update

Corey Rosen

November 22, 1999

(Corey Rosen)

Senate Passes ESOP S Corporation Reform Rules, But Measure Dropped in Final Tax Bill

As part of a bill extending expiring tax incentives (S. 1792), the Senate adopted legislation introduced by Congressman James Ramstad (R-MN) and Senator Donald Breaux (D-AL) (HR 3082 and S 1732) designed to curb abuses of the S corporation ESOP law. The proposal builds on a similar bill that was in the tax bill President Clinton vetoed. It defines as a disqualified person anyone who has more than 10% of the deemed fully allocated shares of the company, or whose family has more than 20%. If this group owns more than 50% of the company, including through synthetic equity, then no one in the group can get an allocation of shares in the ESOP that year. Violations trigger a 50% corporate excise tax and individual income tax. If these anti-allocation rules are triggered, there would also be a 50% excise tax on the company on any "synthetic" equity that this group holds that year.

The House Ways and Means Committee appeared favorably disposed towards the bill, but the Administration opposed any change to S Corporation ESOP rules that did not eliminate the non-taxability of the ESOP trust in these companies. In the rush to adjourn, the House sent to the Senate a tax extenders bill that continued only those tax incentives that the House, Senate, and Administration agreed on. The ESOP provision, therefore, was not included. The bill's sponsors will try again next year on another vehicle.

Multinational Employee Ownership Plans Continue to Grow

The number of companies setting up multinational employee ownership plans continues to expand rapidly, according to a number of speakers at the most recent Conference on Global Equity Compensation sponsored by the National Center for Employee Ownership and the American Compensation Association. Speakers from Arthur Anderson, William Mercer, Baker & Mckenzie, Hewitt Associates, and other firms report that more and more of their clients are setting up these plans. At least 100 large US multinationals now have plans that offer options or similar equity packages to most or all of their employees worldwide, covering millions of employees. A growing number of smaller companies and companies in the UK, Continental Europe, and elsewhere are joining the trend as well. Finnish companies seem to be taking the lead. Erriki Helaniemi of Alexander Corporate Finance in Helsinki reports that 70% of the Finnish companies that offer options offer them to all employees. Most Finnish companies have operations abroad, and extend these plans to employees there as well.

The growth of the plans is especially impressive in light of the enormous complexity of setting up plans worldwide. Sun Microsystems, for instance, has employees in 150 countries, built its leadership, as in the case in many other multinationals, believes that extending ownership worldwide is an essential part of the company's strategy and vision.

The NCEO will establish a web site providing information on rules and practices on these issues sometime in the future.

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