The Employee Ownership Update
November 2, 2015
New Report on Employee Ownership from the Center for American ProgressLast week, the Center for American Progress released a second policy-oriented report on employee ownership, this time focusing on understanding the scope and policy implications of risks associated with retirement-based employee ownership. In Mitigating Risks to Maximize the Benefits of Employee Ownership, Karla Walter and Danielle Corley argue that employee ownership "could promote broad-based wealth creation, thereby fostering sustainable economic growth and reducing inequality."
They note that one of the major impediments to stronger support from policy makers is a concern about risks associated with employee ownership, and their report is intended to both investigate the extent to which this concern is legitimate and to propose three policy solutions: limiting company stock in 401(k) plans, allowing early diversification when an ESOP involved wage or benefit conditions or when a company's only retirement plan is an ESOP, and better-targeted regulatory oversight of ESOPs. Walter and Corley note that their recommendations are "targeted to address the minority of companies with employee ownership where workers face undue risk. In sum, this report aims to start a dialogue about how to better protect workers while still offering the benefits of inclusive capitalism."
Fiduciary Claim Against GreatBanc DismissedIn Allen v. GreatBanc Trust Co., No. 1:15-cv-03053 (N.D. Ill. Oct. 1, 2015), a district court dismissed a lawsuit against GreatBanc Trust in its role as a fiduciary in an ESOP transaction at Personal-Touch Home Care. Plaintiffs argued that the stock dropped to 78% of its pre-transaction value after the transaction and that the ESOP borrowed money at 6.25% instead of the 4.25% rate plaintiffs said was the going rate for ESOP loans. The court said the allegations were merely conclusory, not backed by evidence. Although the stock fell even further over time (to 55% of the transaction price), the court ruled that it must make its determination as of the transaction.
Notably, the Court referred to the Dudenhoeffer Supreme Court case in ruling that "Absent an allegation of special circumstances regarding, for example, a specific risk a fiduciary failed to properly assess, any fiduciary would be liable for at least discovery costs when the value of an asset declines. Such a circumstance cannot be the intention of Rule 8(a), or Dudenhoeffer. An allegation of a special circumstance is missing in this case—in fact, we know absolutely nothing about the financial situation of Personal-Touch."