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The Employee Ownership Update

Loren Rodgers

November 15, 2013

(Loren Rodgers)

Solicitor General Requests Supreme Court Ruling on Presumption of Prudence

In an amicus curiae brief filed on November 12, the Solicitor General argues that the Supreme Court should review the presumption that investments in company stock by ESOPs and other benefit plans are prudent by virtue of being specified in the plan. Seven circuit courts have upheld some version of the presumption of prudence. The presumption of prudence originates in a 1995 ruling in the Third Circuit's case Moench v Robertson and may be rebutted by showing that the company was in a "dire financial predicament."

The brief argues against the presumption of prudence, noting that circuits have different interpretations of the presumption. The brief states that "ERISA's basic policy objectives, in fact, counsel against a judicially fashioned presumption that ESOP fiduciaries have acted prudently." ESOP advocates argue that the presumption is consistent with Congressional intent to promote employee ownership through ERISA-covered plans and warn of a possible wave of litigation if the presumption is overcome.

The Solicitor General's request makes it likely that the Supreme Court will review the issue. If it does, a decision is likely by June 2014.

New Survey on Employee Attitudes Toward Stock Plans

Morgan Stanley has published a new survey of 750 stock plan participants in large public companies that describes how employees react to these plans. The report, Attitudes and Behaviors of Stock Plan Participants, unfortunately does not provide much detail on how people were selected to participate, so the data on who is participating is not necessarily representative of the universe of stock plan participants. Nonetheless, the results do provide some useful insights.

Twenty-one percent of the participants were executives; 65% are professional, technical, supervisory, or managerial employees; and 14% are hourly. Forty-two percent had incomes of $200,000 or more. Ninety-two percent of the respondents are satisfied with their plan, and 57% very satisfied. Recipients getting options, restricted stock, or performance shares (a group that skews more towards higher-paid people) value their plans more than 401(k) plans; ESPP participants just slightly less. Overall, participants reported having 12.1% of their pay invested annually in stock plans compared to 7.6% in 401(k) plans. Seventy-five percent of respondents said having a stock plan makes them feel more invested in the company and 67% said it shows the company truly values its employees.

Iowa Launches Programs to Encourage ESOPs

The Governor of Iowa, Terry Branstad (R) announced on November 12 that a public-private partnership would host a series of five meetings around the state in November and December, designed to inform business owners about the advantages and incentives supporting ESOPs. In recent years, Iowa has passed a 50% state-level capital gains deduction for qualified ESOP sales and a program to provide state financial support for ESOP feasibility assessment. Gov. Branstad says, "ESOPs are more than just an employee benefit plan, they are a transition plan for business owners and a growth strategy for communities."

Mondragon's Fagor Cooperative Declares Bankruptcy

Fagor Electrodomesticos, the flagship of the Mondragon cooperatives, announced on November 13 that it would file for bankruptcy protection. Fagor is the fifth largest electrical appliance company in Europe and the original cooperative in Mondragon, the best known federation of worker cooperatives in the world. Fagor has suffered a one-third decrease in sales over the past five years, largely due to Spain's economic crisis and competition from Asia.

Fagor had requested 170 million euros from its umbrella group, the Mondragon Cooperative Corporation (MCC). The MCC's general council rejected the request, noting that it has already provided 300 million euros. In a statement, the council said that Fagor "no longer responds to market needs, and the financial resources it requests would not ensure its business future."

The MCC pledged to support the 5,600 Fagor employees by finding jobs for them in other Mondragon cooperatives, by allowing early retirement, or by providing job training. The MCC also reaffirmed its commitments to "the particular values of cooperativism (people come first, the sovereignty of labour over capital, participatory management and inter-cooperative solidarity) [which] are now more than ever the keys to the management of the companies of the future."

Training for Internal Fiduciaries

The Beyster Institute at UC San Diego's Rady School of Business will hold its Certificate Program for Non-Professional Fiduciaries on February 9 to 12.

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