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The Employee Ownership Update

Corey Rosen

July 16, 2007

(Corey Rosen)

ESOP Tax Cost Projected at $1.89 Billion

The Office of Management and Budget has calculated the costs of special ESOP tax benefits at $1.89 billion for 2007, rising to $2.67 billion by 2012. In comparison, the exclusion of reimbursed employee parking expenses will cost $2.89 billion, while 401(k) plans will cost $42.4 billion and IRAs $5.7 billion. OMB estimates calculate the non-taxability of the ESOP's share of corporate profits as a tax cost, although, arguably, it is actually only a deferral of tax that will be paid when employees receive distributions.

SEC Proposes Not to Count Options for 500-Shareholder Rule

On July 5, 2007, the SEC issued a proposal to exempt certain stock options and their underlying shares from the current rule that they be counted toward the 500-shareholder rule requiring companies to comply with securities laws if they have more than 500 shareholders and $10 million in assets. Options have to be granted subject to a written plan to employees, consultants, director, and advisors. They can be transferable only under limited circumstances, and option holders must receive disclosure information about the security as required under Rule 701 (a rule allowing certain equity sales to employees to be exempt from registration requirements). The SEC is also proposing to exempt companies that have registered their shares from having to register the options as well (the underlying shares would already be registered). They would not have to comply with the Rule 701 disclosure requirements because they are already meeting stricter public company disclosure rules.

Comments to these proposals can be submitted to the SEC on or before September 10, 2007. Details are here and here (both documents are PDFs).

An ESOP for Dow Jones?

Ron Burkle of Yucaipa Capital and Brad Greenspan, an Internet entrepreneur, are proposing to buy the Dow Jones Company, publisher of the Wall Street Journal, using an ESOP as part of the transaction. Burkle had tried to buy the Tribune Company using an S corporation ESOP and earlier tried to incorporate an ESOP in return for labor concessions as part of a buyout of papers owned by the McClatchy chain. The role of the ESOP in the Dow Jones proposal has not been disclosed. Most observes believe that the company will be sold to Rupert Murdoch's News Corporation.

Employee Ownership Effort in Bangladesh

The Institute for Integrated Rural Development, a nonprofit organization in Bangladesh, is starting a 534-employee employee-owned garment manufacturing business for poor rural women in the country. Employees would own 75% of the stock, using a model developed by the Center for Economic and Social Justice in Arlington, Virginia. Employees will own the shares through a workers' association, similar to those now operating in Egypt. Employees will have a role in decision making at the company as well. The project has already recveived substantial financial backing, as well as pledges from major retailers, including Wal-Mart, to purchase its products. Information on the project, and how to support similar efforts, can be found at www.iird.interconnection.org.

South Africa Continues to Move Forward on Employee Ownership

Three of South Africa's largest companies-Italtile, Tongaat, and Woolworths-have introduced employee ownership plans. Woolworths, a large chain of food and clothing stores, is providing preferred stock worth 10% of the company that the company projects could be worth R250,000 per employee after eight years (about $35,000). The company is guaranteeing a minimum of R20,000 if the company does not grow at least 10% per year. The Woolworths plan is more generous than those of other large employers, where plans typically own more in the 5% range. Many of the country's large mining companies have already introduced plans.

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