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The Employee Ownership Update

Loren Rodgers

July 15, 2015

(Loren Rodgers)

Bipartisan Senate Working Group Supports S Corporation ESOPs

Last week, the Senate Finance Committee released several reports, and the one on savings and investment mentions ESOPs. The working group that produced the report singled out the Promotion and Expansion of Private Employee Ownership Act ( S. 1212), noting that it "contains several provisions to further encourage employee-ownership in S corporations, including extending the gain-deferral provisions of Code section 1042 to sales of employer stock to S-ESOPs, providing resources to small businesses contemplating making the transition to an ESOP, and ensuring that SBA-certified small businesses do not lose their status by becoming employee owned" (p. 13).

SEC Launches Probe into Derivatives Trading Based on Pre-IPO Employee and Investor Shares

The SEC announced that it is investigating several transactions where investment firms have traded derivatives in hot pre-IPO companies that are based on employees and investors selling rights to appreciation in their equity. While secondary markets for such shares are not illegal, the SEC is concerned about fees for these securities and claims by the packagers about what they are selling. Because many of these firms release limited financial information, the field can be ripe for fraud. Employees may also be violating company policies at some firms by agreeing to trades. The investigation does not focus on established secondary markets, such as the NASDAQ National Private Market, which allows firms to allow employees to sell their equity investments on a regulated exchange.

July 3: Employee Ownership Day in the United Kingdom

On July 3, the United Kingdom celebrated Employee Ownership Day. The president of the Employee Ownership Association of the UK (EOA), Iain Hasdell, said "employee-owned companies now account for over 30 billion [47 billion USD] of UK GDP." A group of employee ownership organizations released The MoralDNA of Employee Owned Companies, a preliminary report of an ongoing study of 829 employee-owners at 14 companies by Roger Steare and colleagues. The report finds that "the cultures of employee owned businesses are much less hierarchical and more collegiate than others" (p. 6) and that "90% of people working in employee owned companies experience high-performing visionary, affiliative, democratic and coaching leadership styles," compared with 59% among a comparable group of non-employee-owners. The study also found higher rates of commitment, improved recruitment, and longer-term decision making.

Graeme Nuttall is the author of the report that served as the basis for the UK government's push to promote employee ownership, and his law firm, Field Fisher Waterhouse, partnered with EOA, Prospects, and the UK's Chartered Institute of Public Finance and Accountancy to release a second report on employee ownership in public services.

New York Second Circuit Court Denies Two Remanded Stock Drop Cases

The Circuit Court for the Second District of New York continues to be a tough place to plead a stock drop case. In May in In re Citigroup, it ruled that the heightened pleading standards under the Fifth Third Bancorp v. Dudenhoeffer ruling required that plaintiffs show "special circumstances" as to why trustees should act on public information to remove company stock. Plaintiffs asked for reconsideration under the Supreme Court's Tibble v. Edison International ruling extending the statute of limitations for filing a lawsuit to six years in certain cases rather than three. The court said that did not apply here because plaintiffs had said the information was public as of 2008. Interestingly, the court also said that Tibble applied to buying mutual funds at too high a price, creating an accrual of responsibility that differs from not selling stock, in which case only the three-year period would apply. In In re Lehman Bros, the same court came to much the same conclusions as to the heightened pleading standards under Dudenhoeffer and the inapplicability of the six-year statute of limitations under Tibble.

Review of ESOP Research in Tax Notes

The NCEO's founder, Corey Rosen, published a detailed review of the evidence on ESOPs as a retirement plan in the June 22, 2015, issue of Tax Notes. The article was in response to a prior article arguing that ESOPs needed major reform to be part of the retirement system. A PDF of the article has been posted on our site, and readers are encouraged to share it.

The NCEO Releases Its New Logo

The NCEO updated its logo. We hope you like it! If you find any examples of our old logo on our site, please let us know.

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