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The Employee Ownership Update

Corey Rosen

February 21, 2006

(Corey Rosen)

IASB Releases Share-Based Compensation Exposure Draft

The International Accounting Standards Board (IASB) has issued an exposure draft for amendments to its share-based accounting rules (IFRS 2 Share-Based Accounting). The amendments would restrict vesting conditions to service periods or performance. It would also treat all cancellations of share-based payments the same, regardless of who cancels them. Details are at http://www.iasb.org/.

Retirement Reform Legislation Moving Closer to Passage

A House-Senate conference committee is likely to be held soon to try to iron out differences between versions of pension plan reforms passed by both houses. Although much of the controversy focuses around funding of defined benefit plans, the bills also contain similar provisions providing greater diversification rights for employees holding employer stock in public company 401(k) plans and KSOPs. One version also shortens the vesting period for plans to six years. Prospects for agreement are still uncertain, however, and the Administration has expressed strong concern that the pension funding changes are inadequate.

European Prospectus Directive May Discourage Stock Purchase Plans

According to speakers at a recent conference held by the ESOP Centre in London, the requirements of the recent Prospectus Directive from the European Union may discourage some non-EU companies from running employee stock purchase plans. These companies now may have to file expensive prospectuses for their EU operations every time they issue shares to employees. Motorola has already stopped its EU share purchase plans, and other countries are considering it. The problem appears to be in an imprecisely drafted document. EU European Commission members may revisit the document to try to correct the problems.

Court Rules that Acquiring Company Employees Can Participate in ESOP Windfall

In Fox v. Herzog, Heine, and Geduld, Inc., No. 01-CV-1827 (D.N.J., 12/27/05), a district court ruled that employees of Merrill Lynch could participate in the allocation of suspense account shares previously held in the Herzog, Heine, and Gedlud (HHG) ESOP after Merrill Lynch acquired HHG. HHG's ESOP received $354 million worth of Merrill stock. The HHG ESOP loan had not been fully repaid at the time of the acquisition, so a number of shares had not yet been allocated. The acquisition price was enough to repay the remaining loan and leave a windfall. HHG's ESOP was merged into Merrill Lynch's ESOP, and the suspense account shares were allocated to all employees of the combined firms.

Two former HHG executives sued, arguing that the ESOP trustee should have prepaid the loan so as to release the shares just to HHG employees. The court, however, ruled that there had been no loss to the plan; the acquisition procedure only changed who benefited form the shares. The court further ruled that the plaintiffs had asked for the shares or their monetary equivalent to be reallocated to HHG plan participants, but that because the plaintiffs did not have the unallocated shares in their accounts, they could not claim any right to them.

The case raises an interesting question of who should benefit from an ESOP acquisition-the employees of the target or all the employees of the merged company.

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