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The Employee Ownership Update

Loren Rodgers

December 16, 2013

(Loren Rodgers)

Supreme Court to Hear Case on Presumption of Prudence

On Friday, the Supreme Court granted certiorari in Fifth Third Bancorp v Dudenhoeffer (No. 12-751), meaning that the court will review a ruling by the Sixth Circuit Court of Appeals to determine whether ESOP fiduciaries are entitled to a presumption of prudence. The so-called Moench presumption has been accepted by some circuit courts, although in different forms.

The Sixth Circuit had ruled that plaintiffs were not required to "plausibly allege" in their complaint that fiduciaries had abused their discretion to overcome the presumption of prudence. Fifth Third requested that the Supreme Court review that finding and a second question of whether SEC filings become fiduciary communications when they are referred to in plan documents. The Supreme Court agreed to review the first question but not the second.

The Solicitor General had requested that the Supreme Court review the first question, but to expand the scope of the review from the role of the presumption of prudence in the complaint to whether the presumption should ever apply in cases involving employer stock. The Supreme Court instead elected to review the first question as Fifth Third presented it.

In its December 16 analysis of the Supreme Court's announcement, the law firm McDermott Will & Emery writes, "The Supreme Court's decision to grant certiorari suggests that the Supreme Court will resolve the current division among circuit courts regarding the application of the 'presumption of prudence' in employer stock cases—in particular, whether the parties must engage in expensive discovery before plaintiffs' claims will be addressed by the courts."

UK Increases Incentives for Owners to Sell to Employees

The Chancellor of the United Kingdom, George Osborne, announced in early December that the government would increase the allocation of funding to support employee ownership from the 50 million ($82 million) in the budget to 75 million ($123 million). The funding will support a form of employee ownership similar in some ways to US ESOPs. When business owners sell shares to a qualified employee trust, and the resulting ownership by the trust amounts to a controlling interest in the company, the sellers will receive relief from taxation on their capital gains.

The funding also specifies that staff in qualifying employee-owned businesses will be able to receive up to 3,600 ($59,900) annually in bonus payments tax-free. This provision is because some employee-owned businesses in the UK, such as the John Lewis Partnership and Tullis Russell, are indirectly employee-owned, with the shares being held in a perpetual trust. Unlike US ESOPs, employees in such companies do not receive shares when they leave the company, and they cannot receive dividends since they are not direct shareholders. Instead, they receive bonus payments.

Iain Hasdell of the UK's Employee Ownership Association said that the expanded initiative "marks another key step towards our target of 10% of GDP being delivered by employee-owned businesses by 2020."

UBS Study: Experience with Equity Vesting Changes Attitudes

UBS released a study that documents changes in attitudes about equity compensation and wealth management as employees have increased experience with such plans. The study, the UBS Equity Award Value Index™, concludes that employees who have six or more vesting experiences tend to see equity compensation as "a way to build wealth." Those with three to five vestings tend to see equity compensation as "a paycheck supplement," while those with two or fewer vestings are most likely to see equity compensation as a "lottery ticket." They also found that those with less equity compensation experience were less likely to see equity compensation as an important motivation for taking a particular job (19% for those with fewest vestings versus 48% for those with most) and for staying at a job (29% for those with fewest vestings versus 51% for those with most).

The NCEO Is Hiring a New Research Project Director

To respond to new research opportunities and strengthen our existing projects, the NCEO is planning to hire a new staff person who will be focused almost entirely on research. Candidates should have strong quantitative skills, especially in databases and spreadsheets, an ability to quickly understand complex concepts, good communications skills, and an ability to work independently and in teams. We prefer experience with data management and a demonstrated interest in employee ownership or related fields. See this page on our site for more information.

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