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The Employee Ownership Update

Loren Rodgers

August 15, 2012

(Loren Rodgers)

China Considers Broad-Based Employee Ownership Plan

On August 5, the Chinese news agency Xinhua announced that the China Securities Regulatory Commission had issued a draft of regulations that would allow employees of publicly traded companies to use a portion of their compensation to purchase shares in their companies. This would represent a significant policy change for China, where existing plans only apply to senior managers.

The new plans are called employee stock ownership plans, or ESOPs, but they would differ from U.S. ESOPs in many ways. Unlike U.S. plans, which are generally retirement plans in which all or most employees participate, employees under the proposed Chinese ESOP would have to choose to use a portion of their compensation to purchase shares. They would also be able to sell those shares after 36 months.

The plan, which Xinhua said was expected to "help increase efficiency and comprehensive strength of a listed company," has drawn mixed reviews. Critics note that the plans would cause dilution of existing shareholders and point out the uncertain tax implications, which are still being negotiated. Employer stock would be managed by an independent asset management company, but professor Zhou Ye'an of Renmin University worries that the law is not sufficiently detailed to prevent the asset managers from colluding with company management.

Trends in ESOP Transactions

The NCEO used data from the U.S. Department of Labor (DOL) to estimate trends in the number of new ESOPs created from 2007 and 2011, as well as the average value of stock purchased per transaction. The number of ESOP transactions was close to flat from 2007 to 2008, but fell by approximately 40% in 2009 and remained at roughly the same level in 2010. The median value of company stock in the transactions reported in the DOL data was $1.4 million in 2007, and increased to nearly $2.0 million in 2008 before falling to $1.2 million in 2010. The average value of company stock was much higher (between $4.4 and $6.6 million, except for 2008 when the average value was $17.2 million), suggesting that some much larger transactions happened in 2008. The data is approximate, and only includes ESOPs that received company shares in the same year they were established.

Updated Legal Resources on ESOPs from the NCEO

The NCEO has just released new editions of two publications. ESOP Regulatory Rulings 1990 to 2012 summarizes rulings and regulations on ESOPs and related plans such as private letter rulings (PLRs), DOL advisory opinions, DOL field assistance bulletins, IRS Technical Assistance Memoranda, and similar pronouncements such as the "ESOP Cadre" guidance.

ESOP and 401(k) Plan Employer Stock Litigation Review 1990 to 2012 categorizes and summarizes ESOP-related decisions and, starting in 2010, most 401(k) cases. It includes over 300 cases, including more than three dozen added since the 2011 edition.

Ownership Thinking Conference on October 11-12

The sixth annual conference on Ownership Thinking will take place October 11 and 12 in Englewood, CO. Hosted by NCEO board member Brad Hams, the conference theme is "creating cultures of accountability and purpose."

Employee Ownership and Manufacturing Jobs

In a guest column in the Cleveland Plain Dealer, CEO Louis Guzzetti of ESOP-owned Spinnaker Coating makes an eloquent case for ESOPs, calling them a "proven mechanism to...slow the jobs exodus." He quotes a long-time Spinnaker employee as saying "For the first time in 27 years, I feel the responsibility of ownership—and it feels great."

Author biography and other columns in this series

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