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The Employee Ownership Update

Loren Rodgers

October 1, 2014

(Loren Rodgers)

Fourth Circuit Ruling Increases Standard of Prudence for Fiduciaries

In Tatum v. RJR Pension Inv. Comm., No. 13-1360 (4th Cir. Aug. 4, 2014) the Fourth Circuit Court of Appeals ruled that the standard for the fiduciaries of the R.J. Reynolds (RJR) 401(k) plan should be whether a prudent fiduciary "would have" made the same decision, not, as the district court ruled, "could have." The case involved the elimination of two company stock funds as investment options in the company's 401(k) plan when RJR was spun off from Nabisco.

The district court had ruled that the suit failed because a prudent fiduciary "could have" made the decision to eliminate the company stock funds, even though the also court ruled that the committee had spent very little time on the decision and had failed to thoroughly investigate the alternatives and risks. Tatum appealed, and the Fourth Circuit remanded the ruling, saying the appropriate standard is whether a prudent fiduciary "would have" made the same decision. The Fourth Circuit ruled the "could have" standard was too lenient and that the "would have" standard has been widely applied by other courts in a number of fiduciary contexts. The "could have" standard would mean that a much broader range of choices could still be considered prudent.

The Chamber of Commerce and the American Benefits Council requested a full en banc rehearing of the case, saying the "would have" standard raised a new and much more difficult hurdle for fiduciaries. On September 3, the court denied the request.

Baker & McKenzie Releases 2014 Global Stock Plan Information

The law firm Baker & McKenzie today released its 2014 Global Equity Matrix (PDF), a summary of compliance, tax, securities, labor, and privacy issues for employee stock options, stock purchase plans, and restricted stock in 50 countries.

New Jersey Advances Legislation to Encourage ESOPs

On September 17, the Labor Committee of the New Jersey Senate unanimously approved bill S945, legislation by Donald Norcross (D) that creates a gross income tax exclusion for capital gain in connection with qualified transactions in which small businesses establish ESOPs. "We want Jersey-owned businesses to stay locally owned," Senator Norcross said. The bill would allow to exclusion of state capital gains tax for businesses with 500 or fewer employees if the ESOP ends up owning at least 30% of the company's shares.

SEC Issues Charges for Failure to Disclose Stock Holdings

On September 10, the U.S. Securities and Exchange Commission charged 34 companies, executives, and shareholders with violations of federal laws requiring disclosure of stock trades and holdings by corporate insiders. The charges mark the first time the SEC has used "sophisticated computer algorithms and quantitative data sources" to identify patterns of late disclosure filings. Required filings were delayed by a period of weeks, months, or years. All except one of the companies charged have settled the case for a total of $2.6 million in penalties. The investigation involved two filings. Form 4 is required of corporate officers, directors, and 10% shareholders, and schedules 13D and 13G are for 5% shareholders.

The American Benefits Council: Recommendations on Stock Plans

Issued in September, the American Benefits Council's document A Vision for 2020: Flexibility and the future of Employee Benefits (PDF) includes recommendations across a wide array of benefits issues. Many of the recommendations are based on their observation that "The average time spent in retirement has also lengthened from 9.6 years in 1970 to 17.6 years today for men and from 14 years to 20.6 years for women over that same period" (p. 5). Two of their recommendations cover company stock in benefit plans: recommendation 4.h is to "[m]aintain the availability of company stock to employees as an investment alternative in a retirement plan" and 4.i is to "[s]upport the flexibility to use stock-based compensation as part of an employee benefit package designed to recruit and retain talent," in which they specifically proposed "clarifying the tax withholding treatment of statutory stock options, exempting incentive stock options from the Alternative Minimum Tax and encouraging Employee Stock Ownership Plan (ESOP) dividend reinvestment."

Aspirations: Conference for Private Companies with Equity Compensation Plans on November 3

Stock & Option Solutions will be holding its fourth annual Aspirations conference in Campbell, CA on November 3. Aspirations is a one-day conference for stakeholders in private company equity compensation programs. Aspirations brings together experts on stock plan management, securities law, accounting standards, taxation, and international topics to help attendees from fast-growing private market companies get a grip on their equity compensation challenges. Executives and stock plan staff from companies preparing their stock plans for an IPO or liquidity event, dealing with complex issues arising from the management & administration of their plans, or looking to gain valuable knowledge around private equity compensation will find this event extremely useful. The NCEO is a cosponsor of the meeting. For details, go to this link.

B Corporation List Features Employee Ownership Companies

In its 2014 Best for the World list, the nonprofit organization B Lab announced the companies with the highest scores on its assessment. B Lab is the organization that designates companies as Certified B Corporations based on "a rigorous and comprehensive assessment of a company's impact on its workers, community, and the environment." The list includes the following employee ownership companies: Chroma Technologies, CHCA, Dansko, King Arthur Flour, Mal Warwick Associates, Namaste Solar, New Belgium Brewing, South Mountain Company, West Paw, and Woodfold Manufacturing.

Business Insurance Magazine Recognizes Employee Ownership Companies

The magazine Business Insurance recently listed the 15 best mid-sized companies to work for in the field as of 2014. The list includes four employee ownership companies: Woodruff Sawyer (no. 2 on the list), IMA Financial (no. 6), J. Smith Lanier (no. 8), and RLI (no. 11).

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