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The Employee Ownership Update

Corey Rosen

April 16, 2007

(Corey Rosen)

Kerkorian Proposes Employee Ownership in Chrysler Bid

Maybe employee ownership is catching on, at least as a way to help finance troubled companies. Financier Kirk Kerkorian has proposed sharing ownership with union workers at Chrysler in return for their agreeing to changes in health care costs. The UAW did not respond. Kerkorian is one of a few serious bidders to buy Chrysler from Daimler Chrysler.

Chrysler had an ESOP mandated by the Chrysler Loan Guarantee Act of 1979. It put $167.5 million in stock in the plan at the outset. The plan was terminated when the loan was paid off. Workers ended up with a strong return on the ESOP. They did not give anything up for it in exchange that would not have been given up under terms of the Act if the ESOP amendment had not been added.

Tax Expert Predicts Wave of ESOP in Mergers and Acquisitions

Robert Willens, the ubiquitously quoted tax analyst at Lehman Brothers, told the Wall Street Journal on April 9 that ESOP S corporations would be the "wave of the future" in merger and acquisition transactions. Of course, vastly more "waves of the future" are predicted than ever occur, but the fact that a source like Willens is saying this suggests that ESOPs may be taken more seriously in these transactions than they have in the past.

New 409A Deferred Compensation Regulations Issued

The new regulations for deferred compensation taxation have been issued-all 400 pages of them. For equity compensation plans, the rules are basically the same, but they allow companies to give departed employees more time to exercise options without triggering the tax. Prior rules required the options to be exercised within 90 days of termination; the new rules allow up to 10 years after the original grant date as well. The definition of service recipient stock has also been liberalized so that service recipients of companies where the parent owns less than 50% of the stock can be issued options exempt from the deferred compensation rules. The definition of allowable stock is broadened as well by allowing any kind of common stock, not just the class that is either publicly traded or has the highest combination of voting and dividend rights. Finally, the valuation requirements remain substantially the same for private companies, with the significant addition that recent equity sales provide a safe harbor.

The NCEO will provide a detailed issue brief on this topic in the near future.

Second Phase of Guidance, Procedure, Systems Report for Equity Professionals Issued

The Certified Equity Professional Institute (CEPI) has released the second installment of its research study on risks and controls for equity compensation, specifically addressing exercise processes, taxes and payroll issues, and accounting issues. It is the culmination of extensive interviews, in-depth analysis and a widespread survey. These guidelines can be used by internal and external audit teams to understand the material risks and identify appropriate internal controls. The publication is open for public comment until May 17, 2007.

Author biography and other columns in this series

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