The Employee Ownership Update
January 5, 2009
Repricing Wave?Lots of companies are looking at some form of repricing their underwater stock options. VM Ware, Tenet Healthcare, Marvel Technology, Integrated Silicon Solutions, and Maxim Solutions are among the estimated 50 or so companies that have repriced through December. Typically, employees surrender existing options worth a certain amount or more in exchange for a lesser number of new awards with the same current value. RiskMetrics' Patrick McGurn says the investment advisory service is not necessarily opposed to reissuing awards that have long been underwater, but he thinks most companies should just "take two aspirin" and wait several months to make any decisions. A good story on this can be found at this link.
IRS Puts Hold on Approving Plan Provisions Segregating Accounts in ESOPsRepresentatives from the IRS have informally told ESOP advisors that they were putting on hold approving plan provisions that segregate ESOP accounts at termination until the agency comes up with a position on this issue. Segregation is a common ESOP practice in which employee accounts are converted into invested cash when an employee terminates, then held there until the account is distributed. Companies do this for a number of reasons, including freeing up shares for other employees, limiting the risk (and potential gain) of holding employer stock by former employees, and locking in a repurchase price at current value.
The issue is whether segregation violates ESOP rules by preventing employees from having the benefit of ownership, and does so in a discriminatory fashion. An argument can be made that it is far more prudent for former employees not to be concentrated in employer stock, but, opponents of segregation have asked if this is only offered to former employees, shouldn't it be offered to everyone?
At this point, there is no regulation or technical advice on this matter. Companies that currently have segregation features do not necessarily have to change them, but when they refile for a new letter in their five-year filing cycle, it is unclear yet whether the IRS will approve. Similarly, new plans can add incorporate this provision, but will probably also have to wait until the IRS decides how to deal with the issue. Because of the uncertainty on this issue, good legal advice is needed.
Companies can attempt to accomplish some of the same goals by offering employees the choice of moving out of some or all of their stock holdings at termination. If that is not sufficient, the company could extend the offer to employees meeting non-discriminatory requirements, such as minimum age/participation rules more liberal than the current diversification requirements. That could result in the same number of shares being released for recirculation and the same amount of control over the repurchase price, but it might not fully address the issue of former participants still holding company stock.
Of course, if the company has the cash for segregation, it could just pay people out sooner, perhaps in installments. The fear is that that provision might lead some people to leave to get access to their accounts, although just how much of an issue this is hard to assess.
Germany Enhances Employee Ownership OpportunitiesUnder prior law, German employees could receive an annual tax credit of 135 Euros on the purchase of shares in their company. Shares are typically offered at a discount, frequently 20%. The new law increases that to 360 Euros. That means, for instance, employees would not be taxed on the 20% discount they receive when purchasing 1,800 Euros worth of shares. The program is still modest relative to similar kinds of arrangement in the UK and France, where much larger amounts can be purchased in tax-advantaged ways.
A good source on ongoing press information about employee ownership in Europe is the European Federation of Employed Shareholders, which offers links to press stories on a monthly basis.