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The Employee Ownership Update

Corey Rosen

May 2, 2006

(Corey Rosen)

Another Court Says ESOPs Do Not Have to Diversify, Even If Stock Under Pressure

In Smith v. Delta Airlines, No. 1:04-CV-2592-ODE, (N.D. Ga., 3/31/06), a federal district court ruled that fiduciaries of Delta Airline's ESOP did not have a duty to diversify out of Delta stock even though the company was under great financial pressure. Delta's ESOP was used to fund a match to the company's 401(k) plan. Participants could also invest up to 50% of their deferrals into Delta stock. From 2000 to 2004, when Delta appointed new independent fiduciaries to manage the plan, Delta stock dropped 92%. At that point, the fiduciaries removed company stock from the investment choices. Dennis Smith sued in a putative class action lawsuit, alleging that the fiduciaries should have removed Delta stock from both plans much earlier. The court, however, took a strict view of ESOP rules, saying that fiduciaries only needed to diversify if they knew or should have known the company was facing "imminent collapse."

The conclusion differs from that in other federal cases, most notably Moench v. Robinson, which was decided at the appellate level. It is the same argument, however, that was recently made by the court in McKesson HBOC Inc. ERISA Litigation, No. C-00-20030 RMW (N.D. CA., 9/9/05).

Employee-Owned Schools?

Employee stock ownership plans (ESOPs) are popping up in lots of unexpected places. For instance, two of the companies attending the NCEO/Beyster Institute annual meeting were schools. Cedarwood Schools ( in Mandeville, LA, is a private, 100% ESOP-owned preschool-to-seventh-grade institution that has earned a reputation as one of the nation's finest private schools. Katrina posed special challenges Cedarwood, as Mandeville survived the storm better than much of the rest of the area. Enrollment soared, but Kathryn LeBlanc, Cedarwood's director, said they have met the challenge well. High Road Schools ( is also in the process of becoming ESOP-owned. High Road provides individualized schooling for special-needs kids in six states and the District of Columbia. A final example is EdVisions Cooperative in Henderson, Minnesota. EdVisions operates thirteen schools and employs 220 member-owners, including teachers and other educational professionals. It recently received a grant from the Bill and Melinda Gates Foundation to create fifteen new schools.

Annual Conference Sets Record; Innovations Awards Announced

The NCEO/Beyster Institute Conference in St. Paul drew a record 770 attendees. A highlight of the conference was the first annual Employee Ownership Innovations Awards. The grand prize winner this year was Reflexite Corporation, whose innovative plan structures and longstanding commitment to ownership have made it an outstanding employee ownership company for many years. Other winners were Hot Dog on a Stick, for its ability to create ownership culture in the challenging environment of fast food outlets; Calibre Systems, for its overall integration of employee involvement, corporate governance, and plan structure into an effective ownership package; and SmithBucklin Corporation, for its creative plan structure in which employees were able to invest their 401(k) assets in company stock but were provided with protection against the price declining.

If your company is interested in applying for the award next year, contact Loren Rodgers at or visit the NCEO Web site starting in November 2006. The awards are sponsored by TEOCO, an employee-owned software company in Fairfax, VA.

Save the dates March 21-23, 2007, for the annual conference in San Diego next year. Escape winter and join us for what we are sure will be another successful event!

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