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The Employee Ownership Update

Corey Rosen

December 28, 2007

(Corey Rosen)

ESOP, Zell Take Over at Tribune

Eight months after announcing the proposed transaction, Sam Zell has assumed control of the Tribune Company. An ESOP will own 100% of Tribune's shares and Zell will hold warrants convertible into a 40% stake in the company. In a surprise move (and one well-received among many employee groups), CEO Dennis FitzSimmons stepped down, with Zell replacing him. Zell said his first order of business would be to decentralize decision-making, providing much more autonomy to individual business units. He also told reporters that employees would be "shocked at the candor" with which he would disclose detailed financial information about the company and its individual units.

With 21,000 employees, the Tribune Company will be the fifth-largest majority employee ownership company. Because it is such a high-profile operation, it will become the kind of flagship company that United Airlines was for its years as an ESOP. When the Tribune transaction was first announced, many nationally-known pundits said they expected to see private equity firms flock to the model of 100% ESOPs with substantial stock warrants for investors. In fact, however, no private equity firm has yet to replicate that model in any large company.

New 409A Corrections Program Released

In Notice 2007-100, the IRS has provided details on transition relief for deferred compensation taxation rules under Section 409A. The guidance is aimed at specified unintentional operational failures as well as failures for up to the limit on elective deferrals under Section 402(g) that are not corrected in the same taxable year (401(g) provides limits on non-taxable deferrals into qualified employee benefit plans). The relief is contingent upon the employer taking "commercially reasonable" steps to prevent recurrence of the problem. In addition, the notice asked for comments on potential expansion of the program to amounts too large for correction under current guidance.

Construction Industry Predicts More Employee Ownership

FMI Consultants, the leading construction industry consulting firm, predicts that broad-based employee ownership will increasingly replace family ownership in the industry. That trend was identified as one of the four leading trends for the industry, along with green buildings, productivity improvement, and the growing use of Hispanic employees.

Top 10 Employee Ownership Stories of 2007

It's purely unscientific, but here is what I saw as the top 10 developments of the year:
  1. The percentage of employees in broad-based plans dropped, but not by much. Thirty-five percent of employees working for stock corporations own stock or equity rights in their employer, down from 38.5% in 2002. The decline came from employees with stock options, with the percentage falling from 13.1% to 9.3%.
  2. The number of ESOP companies and employment at these companies grew by about 5% in 2006, with assets now at $675 billion.
  3. An ESOP bought the Tribune Company, but private equity forms ignored the model.
  4. France, Germany, and Austria all started serious consideration of legislation to promote much wider employee ownership.
  5. Backdaters went to jail, but in the end, only a relative handful of companies and individuals faced prosecution or derivative shareholder suits.
  6. Google issued marketable options. The structure is innovative but has not yet been copied. Google's growth and continued commitment to broad employee ownership, however, helped preserve the idea in tech companies generally.
  7. Our "Employee Ownership 100" list again was topped by Publix Supermarkets; the top 100 companies now employ almost 600,000 people.
  8. An Employee Ownership Foundation/NCEO study found that ESOPs are terminated mostly because of attractive offers, and much less commonly because of difficulties with repurchase obligations.
  9. "Stock drop" lawsuits continued, with about $1.8 billion in settlements so far, but most employees will only get several hundred dollars each.
  10. The "top companies" lists are still dominated by employee ownership companies. Most of the companies on the Fortune 100 Best Companies to Work for in America® list had some kind of broad employee ownership; 5 of the 15 winners of the Winning Workplace award were majority employee-owned (and others are likely to set up plans soon).

Author biography and other columns in this series

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