The Employee Ownership Update
February 15, 2016
House Passes Legislation Easing Rules for Stock Sales to EmployeesCurrently, under Rule 701 of the Securities Act, companies can offer employees stock to purchase as part of compensatory benefit plans for up to $5 million or 15% of the total stock, whichever is less, during a 12-month period. The offerings must be discrete (not included in any other offer) and are still subject to disclosure requirements. For total sales under $5 million during a twelve-month period to the specified class of people above, companies must comply with anti-fraud disclosure rules; for sales over this amount, companies must disclose additional information, including risk factors, copies of the plans under which the offerings are made, and certain financial statements. These disclosures must be made to all shareholders.
The House has now passed H.R. 1675, the Capital Improvements Act, one title of which would revise Section 230.701(e) of title 17, Code of Federal Regulations, to increase that amount to $10 million, indexed to inflation to the nearest $1 million. The bill passed by 265-159 and now moves to the Senate. The bill is strongly opposed by the Administration over other provisions in the bill that lower reporting, oversight, and disclosure requirements for companies and financial institutions. A presidential veto has been promised.
Growth of Employee Ownership Continues in the UKAccording to a report on the 2014-2015 employee ownership survey conducted by Andrew Pendleton and Andrew Robinson, the count of employee-owned businesses in the UK is about four times larger than in the 1990s. The authors cite several factors for the increase, such as legislation, regulatory action, economic shifts toward the service sector, and privatization. Based on the survey, just under half (43%) of employee-owned companies in the UK are directly owned by individual employees, 28% have a trust owning shares on behalf of employees, and the remainder use a hybrid. They also describe the context for the creation of employee ownership as "business succession (32 per cent of the sample), privatisation (15 per cent), where owners wish to widen ownership (24 per cent), and start-ups (23 per cent)."
New Data on ESOP Companies and Successful AcquisitionsAmong the ESOP companies she studied through 30 executive interviews and survey research, researcher Suzanne Cromlish of Case Western Reserve University found that the ESOP companies tended to accelerate their acquisition activity following 2011. She also found that more than 95% of the reported acquisitions were successful, a stark contrast to the 20% to 50% success rate for acquisitions in general.
Cromlish also looked at the practices commonly used by ESOP companies making acquisitions and found a number of practices—"ethical values, shared visions, long-term orientations, altruistic behaviors, strategic planning, and organizational empowerment processes"—contributed to the success of those acquisitions. She points to some specific practices, such as open-book management, as keys to a successful acquisition. A summary of her findings to date has been posted on this site.