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The Employee Ownership Update

Corey Rosen

July 1, 2008

(Corey Rosen)

Florida Agrees to Buy U.S. Sugar; Employees Will Get Windfall

The State of Florida has agreed to buy U.S. Sugar, a company partially owned by an ESOP, for $1.75 billion. Details of the deal will be worked out over the next several months. The primary purpose of the purchase is to help restore the Florida Everglades by turning over the land the company owns to the state for environmental restoration. The company will continue some processing operations for up to six years. Laid-off hourly employees will get one year's severance pay, and salaried employees will get two years. Employees will receive incentives to stay on during the transition.

The price offered by the state, which amounts to about $350 per share, is a considerable premium over a previous bid of $293 per share. The approximately 3,800 U.S. Sugar ESOP participants (about 1,700 of which are current employees) own about 35% of the company through an ESOP, so they will divide approximately $650 million among them.

The sale proposal comes just weeks after national publicity for a lawsuit of former U.S. Sugar employees. A front-page article in the New York Times (May 29, 2008) reported that some former U.S. Sugar employees believe they were cashed out of the ESOP at a much lower price than they should have been (Sugar Workers, Given Shares, Wonder Why Price Is So Low). Their argument is based on two prior offers from a family-owned agricultural corporation's bid for the company in 2005 and 2007, both of which were as much as 50% higher than what the employees received. The employees also allege that the former CEO of the company was replaced (and given a $10 million golden parachute) after he urged the board to accept the offer. They now say the current offer just proves their point, but ESOP valuation practices would have required these former employees to be paid out at a non-control price, whereas the offers all included a premium for control. The circumstances of the sale to the state, which clearly only had an interest if it could take full control, suggest that a substantial control premium could have been in order.

California Offers Settlement for Taxpayers in Abusive ESOPs

In FTB Notice 2008-04, the State of California has offered a resolution for sellers in certain abusive ESOP transactions. The transactions covered are those in which a 100% ESOP was formed, but the profits of the plan were substantially siphoned off back to the seller or an entity the seller controls. The resolution specifically exempts ESOPs that are subject to "transactions covered by Revenue Ruling 2003-6, 2003-1 C.B. 286; (2) transactions covered by Revenue Ruling 2004-4, 2004-1 C.B. 414; and (3) Management S corporation ESOP transactions described in the IRS's Transaction-specific Frequently Asked Questions released as part of IRS Announcement 2005-80, 2005-2 C.B. 967." These transactions were covered by a previous settlement offer.

Taxpayers seeking resolution under this procedure need to file with the state before September 13, 2008.

NASPP Survey Shows ESPPs Somewhat More Conservative

Preliminary results from the 2007 "Trends in Equity Compensation" survey by the National Association of Stock Plan Professionals and Deloitte show that employee stock purchase plans (ESPPs) have become somewhat more conservative in response to accounting rule changes that became fully effective in 2006. The survey looked at 428 companies, almost all of which are publicly traded and half of which have over 2,500 employees. For most participants, the changes do not dramatically lower the benefits of participation.

Looking just at qualified plans (Section 423 plans), the survey found that 66% of the ESPPs have look-back provisions allowing employees to choose between the price of the stock at the beginning or end of the offering period, compared to 84% in 2004. Seventy-eight percent of the companies offered a 15% discount on the purchase, compared to 87% in 2004. Offering periods were shorter as well. In 2007, 13% of the companies had offering periods of three months, 48% had offering periods of six months, and 28% had offering periods of one year of more. In 2004, 43% of the companies had offering periods of one year or more. For the much less common non-qualified plans, discounts and offering periods were much less favorable to employees.

Among qualified plans in 2007, 38% of the respondents had participation rates of 20% or less, 40% of the companies had rates of 20% to 50%, and 22% of the companies had rates over 50%. Non-qualified plans had very low rates of participation: almost two-thirds (62%) of such plans had 20% or fewer of employees taking part. Comparative participation rates for 2004 were not listed.

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