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The Employee Ownership Update

Corey Rosen

December 10, 1999

(Corey Rosen)

Bill Introduced to Encourage Broad-Based Stock Options

Rep. John Boehner (R-OH) has introduced legislation (HR 3462) that would combine the personal tax treatment of incentive stock option plans with the corporate tax treatment of nonqualified stock options for companies that provide options to at least 50% of their non-highly compensated full-time workers who have worked for the company for at least two years. Provided employees under the plan hold their shares at least two years from grant and one year from exercise, they would pay no tax until the shares are sold and then pay only capital gains tax on sale. Companies, however, could deduct the spread on the options from their taxable income.

Boehner is the chair of the House Education Committee Subcommittee on Employer-Employee Relations. While the bill is not likely to pass in its current version any time soon, its introduction speaks of a growing interest in Congress to encourage a broader application of options for non-management employees.

United's ESOP Not Likely to Be Renewed

Labor unions at United Airline have made it clear that they do not want to exchange further concessions for more stock in the company's ESOP. Company officials, meanwhile, have made it equally clear that further contributions to the ESOP are very unlikely absent these concessions. The result is that no further contributions will be made to the ESOP when its current loan is paid off next year. The plan would remain in place, however until its assets are paid out. Under terms of the agreement setting up the plan, unions would retain board membership and certain control rights until the plan drops from its current 55% ownership to under 20%, an eventuality projected to occur 16 years from now.

While the ESOP will likely not receive additional funding, discussion is continuing about whether some kind of alternative ownership possibilities could be created, such as allowing voluntary purchases of stock.

Computer Associates Executives May Have to Repay Option Windfall

Three executives of Computer Associates could have to repay as much as $558 million from the exercise of stock options if a Delaware Chancery Court's ruling is upheld (Sanders v. Wang, Del. Ch. C.A. No. 16640, 11/9/99). Plaintiffs in the lawsuit contended Computer Associates' stock option plan did not provide for option awards to be adjusted when the company's stock was split. The compensation committee of the board, however, did make the adjustments, providing the executives millions more options than the maximum the plan allowed. While the plan was geared to executives, the lawsuit illustrates the importance of careful drafting in plan language.

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