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The Employee Ownership Update

Corey Rosen

September 15, 2006

(Corey Rosen)

Section 409(A) Deferred Compensation Regulations Still on Hold

Final regulations on deferred compensation rules under Internal Revenue Code Section 409(A) still have not been issued, leading many observers to believe the rules will allow companies until the end of 2007, rather than 2006, to amend current plans to make them compliant with the new requirements. This has particular impact for unvested discounted stock options and for stock appreciation rights, phantom stock, and restricted stock with additional deferral features. These awards would be subject to the new tax rules unless amended before the final allowed date.

Sprint Settlement Reached

The class action lawsuit against trustees of the Sprint Corporation's 401(k) plan was one of the largest "stock-drop" lawsuits to date. It has now been settled out of court for a relatively modest $25 million. Each class member will get $63 in cash. The company will also increase its 401(k) match to 100% for at least one year and will provide employees with financial education about retirement investing. The judge ruled that the settlement, while small, was acceptable because the plaintiffs faced a substantial risk of winning less, or even nothing at all, had they proceeded to trial.

Backdating Lawsuits to Focus on Derivative Actions

When the backdating scandal (discussed in previous columns) erupted, many people expected shareholder lawsuits alleging damage to their stock prices. Many such lawsuits were filed, but the plaintiffs' bar has apparently concluded that it will be too difficult to calculate damages, that the statute of limitations may have expired anyway, and that proving when and how grant dates were manipulated will be tricky. So lawyers are instead focusing on derivative lawsuits in which plaintiff shareholders sue on behalf of the company, typically seeking changes in corporate governance, plus legal fees for the attorneys. It is not clear that plaintiffs can get much, if any, income from these suits, over 50 of which have been filed so far.

Blue Heron Paper Now Employee-Owned

Blue Heron Paper in Oregon City, Oregon, is now 100% owned by its ESOP. The company is one of a small number of companies where an ESOP was used to rescue a plant from closing. KPS Special Situations Fund, an investment banking fund that provides equity for employee buyouts, bought 65% of the company from Smurfit, its former owner, is 2000. The Blue Heron ESOP bought another 35%. The company has succeeded, buying additional assets from Smurfit in 2005. Now KPS has sold its interest back to the ESOP, yielding a 500% return for its investors.

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