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The Employee Ownership Update

Corey Rosen

January 15, 2008

(Corey Rosen)

New Guidance on ESPP and ISO Reporting

Employers do not need to report the exercise of incentive stock options and sale of employee stock purchase plan shares to the IRS for 2007 transactions. On December 19, 2007, the IRS issued Notice 2008-8, pushing back the deadline for reporting to the IRS because it has yet to produce regulations expanding the requirements under Internal Revenue Code Section 6039. The Tax Relief and Health Care Act of 2006 amended the information reporting requirements of Section 6039 concerning exercises of incentive stock options (ISOs) and sales of shares acquired under tax-qualified employee stock purchase plans (ESPPs) to require reporting to the IRS.

The extension does not waive the existing Section 6039 requirement that corporations furnish a written statement to each employee reflecting such transactions. These statements are due on or before January 31 of the year following the year of the transaction.

The amended Section 6039 requires corporations, starting in 2008 for transactions that occurred during 2007, to file information returns with the IRS in addition to providing the information to the employee. The timing and manner in which the information must be reported to the IRS will be set forth in regulations that have not yet been issued. Guidance is expected in the near future.

French Prime Minister Wants to Democratize Stock Options

French Prime Minister Francois Fillon has announced that the government will introduce legislation to prohibit companies from providing stock options to their top executives unless they make the options widely available. Details of the legislation are not yet available. In his campaign, President Nicolas Sarkozy urged that option rights be democratized.

Developments in Stock Drop Cases in 2007

Lawsuits continue to be filed in stock drop cases for ESOPs and, more often, 401(k) plans invested in company stock in 2007, but the pace of new filings has dropped to a trickle. About 80 cases are still in one stage of litigation or another, and few final settlements in or out of court have been reached.

The most significant development of the year was that three appeals courts each ruled that participants who had been paid out of plans and later alleged that fiduciary abuses had caused them to suffer losses could sue to recover their own alleged individual losses, rather than just being able to sue for equitable relief (meaning benefits would have to be restored in the plan, something of little practical value to them). Until 2007, courts generally ruled that paid out employees lacked standing to sue for individual damages, but the appeals courts all concluded this left employees with no practical remedy. Just how the tricky issue of how much the damage cost the employees (assuming the court agrees there were fiduciary abuses) remains unresolved. For instance, if the stock hit a high of $85, then fiduciaries ignored information that would lead it to fall to $35, is the damage $50 per share? Is the highest value the right reference point? Might the shares have dropped some amount even absent the impact of the information? Courts will have to sort that out in the future.

The lawsuits and changes in rules for diversification in 401(k) plans have led the amount of employer stock in 401(k) plans to drop from 19% in 2002 to 11% in 2006.


U.S. District Court Judge James Rosenbaum has indicated he might want to review the settlement between former UnitedHealth CEO William McGuire and the SEC and a special UnitedHealth litigation committee. McGuire agreed to give back about $420 million in options, plus another $200 million he gave up earlier. Still, that left him with hundreds of millions more. In his opinion, Rosenbaum stated that "Words such as 'huge,' 'fantastic,' 'astounding,' 'staggering,' or 'astronomical,' do not describe $1 billion dollars. Such a sum can only be thought of as 'transcendent,' or in terms of the gross national product of smaller members of the United Nations."

Innovations Award: February 1 Deadline

The Innovations in Employee Ownership Award recognizes companies whose innovative ideas keep employee ownership on the leading edge of the economy. We invite companies with ESOPs, broad-based equity compensation plans, ESPPs, or any other form of employee ownership to share their success stories in employee participation, plan design, entrepreneurship, or communication. Among other prizes, winners receive free admission to the 2008 annual conference.

Author biography and other columns in this series

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