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The Employee Ownership Update

Loren Rodgers

June 1, 2015

(Loren Rodgers)

Supreme Court Makes It Potentially Easier for Plaintiffs to Challenge Investment Decisions in Retirement Plans

In Tibble v. Edison International, No. 13-550 (U.S., May 18, 2015), the Supreme Court ruled that plaintiffs can timely commence a claim for breach of fiduciary duty within six years of the breach of a continuing duty of prudence in selecting investments. In 2007, several Edison 401(k) beneficiaries sued regarding funds added in 1999 and 2002, arguing that identical but lower-cost funds should have been used. The district court and the Ninth Circuit ruled that the plaintiffs could not sue regarding funds added in 1999 because the six-year statute of limitations had passed. The Supreme Court reversed, holding that trustees have a continuing duty to monitor trust investments and remove imprudent ones, and thus a claim would be timely so long as the alleged breach of this continuing duty occurred within six years of the lawsuit.

Observers of the decision disagree about how much this really changes fiduciary duties because the requirement to monitor has always been present. A failure to change investments in light of material changes has always trumped the six-year statute of limitations. The Court's decision, however, suggests that more detailed periodic investment decisions than currently are the norm would be required. The Court did not opine on whether the fiduciaries had acted improperly or offer guidance as the standards that fiduciaries should use in monitoring plan investments. Both issues may be made on remand.

The implications for private company ESOPs are unclear. Public companies who have more choices about removing employer stock would seem to be under more pressure to review the appropriateness of that investment, although just how this would change what they already do will need to be worked out in future cases. Fiduciaries of ESOPs in closely held companies rarely have practical options to sell the shares without imposing losses on participants, so it seems likely that this case will have little, if any, impact on ESOPs in these companies.

IRS Plans to Drop Determination Letters for Individually Designed Plans

Due to budget constraints, the IRS plans to stop issuing determination letters for periodic compliance. Under current procedures, companies file for letters of determination in a five-year cycle. The process allows companies to receive IRS validation of plan changes. While not having to file will save some costs for companies, it means companies will not have any assurances that changes they make to a plan are acceptable to the IRS on audit. As a result, companies will need to be particularly diligent in making sure any changes they make to their plans are fully compliant with the law, including periodic internal reviews to make sure plan requirements are being followed.

ESOP Companies Acquiring Other Companies at a Rapid Rate

Data on ESOP formation suggest that new ESOPs are being created at a slightly lower rate than existing ones are terminated. But that only tells part of the story. Based on a survey of ESOP attorneys, we estimate that between 300 and 400 companies are acquired by ESOP companies annually. Two companies, Davey Tree and Ferrellgas, have been the most active acquirers, with more than 200 acquisitions between them over the last decade. While we estimate that about 100 of the target companies employ 20 or fewer people, the remainder look much like companies that might otherwise have established ESOPs themselves.

The numbers help explain why ESOP participant and asset numbers have been growing even though the number of plans has declined.

The NCEO maintains a list of more than 300 acquisitions that have been publicly announced. For details, contact Corey Rosen at crosen@nceo.org.

Reversal in South Africa: Government Decides Not to Reduce Incentives for Broad-Based Ownership

Less than two weeks after the government of South Africa announced it would reduce the incentives for broad-based employee ownership, it reversed its decision. The original decision would have affected the number of points companies with broad-based employee ownership plans earn for Black Economic Empowerment (BEE) credit. Companies that score high on BEE measures, which were designed in part to encourage capital ownership by black South Africans, get preference for government contracts, a large part of the South African economy.

The original announcement caused what the opposition's shadow minister of trade and industry Geordin Hill-Lewis called "two weeks of complete confusion." In announcing the retraction, Trade and Industry Minister Rob Davies acknowledged the mistake and said, "We are back to the status quo." He said that the original proposed reduction was because the ministry had encountered "dodgy" share ownership schemes that failed to provide substantial benefits to employees.

Can We Do It Ourselves?

A film titled Can We Do It Ourselves? explores the political economy and economic philosophy behind democratic control of companies by workers. The one-hour film by Patrik Witkowsky, Jesper Lundgren, André Nyström and Nils Säfström is freely available online and is in English and Swedish.

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