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The Employee Ownership Update

Corey Rosen

June 2, 2008

(Corey Rosen)

District Court Says LaRue Does Not Apply in ESOP Case

In Binita L. Cook et. al. v. Boyd F. Campbell, No. 2:01cv1425-ID (M.D. Ala., May 5, 2008), a district court ruled that a previously decided ESOP case could not be reopened in light of the new legal standard set out in LaRue v. DeWolff, the Supreme Court case that allowed individual defined contribution plan participants to sue for damages to themselves, as opposed to the plan as whole.

In this case, the court had previously denied a claim by the plaintiffs concerning the alleged failure of the fiduciary of an ESOP at Central Alabama Home Health Services to provide for a proper valuation concerning the ESOP's purchase of shares. Now the plaintiffs sought reconsideration in light of LaRue. The court found, however, that even if the plaintiffs' allegations were valid, the actions of the fiduciary would affect the entire plan, not just individual participants. LaRue was premised on the difficulty a plaintiff might have in getting damages when the relief would apply only to that individual and a plan-wide remedy would thus be impractical or inequitable. Here, a plan-wide remedy was already available. Moreover, the court cited the concurring opinion of Chief Justice Roberts expressing concern that LaRue not be read to allow cases to proceed where existing administrative remedies had not been exhausted, as the court found they had not been in this case.

The decision, while hardly surprising in light of the facts of the case, does provide some comfort to those concerned that LaRue would open up another avenue for plaintiffs to plead arguments that would not succeed under prior law.

Cost Accounting Standards Board Finalizes ESOP Reimbursement Rules

On May 1, after many years of uncertainty, final rules were issued by the U.S. Cost Accounting Standards Board for reimbursing ESOP companies for contributions to their plans. The final rules are very favorable to companies. An "ESOP" is defined to include any defined contribution plan designed to invest primarily in employer stock. The reimbursement is for the market value of the shares at the time a contribution is made. The cost is assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs follows Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value. Dividends are allowed as a cost. The regulation does not distinguish in this regard between S and C corporations. Companies operating under an existing approved reimbursement procedure can retain that method or renegotiate under the new rules.

New York Times Article on U.S. Sugar ESOP Creates Controversy

The New York Times (May 29, 2008) ran a detailed front-page look at a lawsuit by workers at U.S. Sugar. Former employees claim they were underpaid for their shares because the company had undisclosed offers from outside buyers (offers not accepted by the company) at substantially higher prices (Sugar Workers, Given Shares, Wonder Why Price Is So Low). The article paints a distinctly negative picture of the plan. The situation is more complex than it appears, however, as discussed elsewhere on this site.

Ownership Thinking Conference Set for Denver September 17-18

The NCEO is one of the cosponsors of the Second Annual "Ownership Thinking" conference, hosted by Brad Hams, an NCEO board member and founder of the consulting firm Ownership Thinking. The conference focuses on how companies can use open-book management, employee ownership, corporate values, and other practices to create ownership thinking among employees. Loren Rodgers of the NCEO will be speaking at the event. Registration is $549 ($469 for additional registrants). For details, go to www.ownershipthinking.com.

Author biography and other columns in this series

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