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The Employee Ownership Update

Corey Rosen

April 14, 2006

(Corey Rosen)

Virginia Allows ESOPs in Some Professional Corporations

Virginia has joined North Carolina and Minnesota in allowing professional corporations to form ESOPs. There are, however a number of requirements. First, the law applies only to accounting, engineering, architecture, land survey, and interior design firms. Medical and law practices are excluded. The trustees of the plan must be licensed professionals in the field; no shares can be distributed to non-professionals except those immediately repurchased; and the ratio of shares allocated to non-professionals must be less than one-half in accounting firms and less than one-third in other firms.

Large Companies Reducing Option Grants

A study by Bear Stearns has found that S&P 500 companies granted 20% fewer options in number and 22% less in value in 2005, while NASDAQ 100 companies reduced the number of options by 14% and the value by 16%. Compared to their peak in 2000?, the number of options has declined by about 50% and their value by about 70%. The study does not address to what extent options have been replaced by other forms of equity awards, such as restricted stock or stock appreciation rights.

Is ESOP Sponsor Liable for Paying Out Sooner Than Required?

In an unusual lawsuit, former employees of King & Prince Seafood are charging that a change in ESOP distribution rules to pay out former participants three years after departure instead of five violated ERISA's anti-cutback requirements. The plan was also changed so that the payout was based on the valuation as of the end of the prior year, rather than when the payout occurred. Paying out sooner than the law requires and basing payments on the last valuation are common plan provisions in ESOPs. A district court certified the case for class action. Employees were upset because under the old rules, they would have received substantially more than under the new ones because the company's stock price rose sharply in the year of the payout. The case Del Rosario v. King & Prince Seafood Corp., No. CVF 204-036 (S.D. Ga. 3/7/06) now must be decided on its merits, but it is a novel theory that what would normally be perceived to be a change in the plan to benefit employees could be interpreted as damaging them by not allowing them the maximum possible time to hold onto their shares.

Retirement Plan Reform Still Mired in Conference

House-Senate conferees have made little progress in reaching a compromise on competing versions of retirement plan bills. Rules for pension plan funding and third-party advice for 401(k) plan participants are the widest areas of disagreement. Both houses broadly agree on provisions that would require diversification options in public company 401(k) plans, KSOPs, and ESOPs with employee deferral features that invest in company stock, and the Senate version would lower the maximum vesting period to six years. Conference leaders still predict an agreement by late spring, but some observes are wondering if the changes will ever be enacted, especially given presidential threats of a veto for current approaches to pension funding.

Author biography and other columns in this series

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