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The Employee Ownership Update

Loren Rodgers

February 15, 2016

(Loren Rodgers)

House Passes Legislation Easing Rules for Stock Sales to Employees

Currently, 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 UK

According 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 Acquisitions

Among 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.

2016 Canadian Employee Ownership Conference: June 7 to 9

Canada's ESOP Association will hold its annual conference June 7-9 in Kelowna, British Columbia. The conference will focus on business success and exit planning through employee ownership and is designed to help Canadian business owners learn how employee ownership can be used as a tool for business growth or as an exit strategy.

CEPI/NASPP Symposium: March 22

Santa Clara University's Certified Equity Professional Institute (CEPI) and the Silicon Valley chapter of the National Association of Stock Plan Professionals (NASPP) will host their 12th annual symposium on March 22 in Santa Clara, California. The symposium brings together a unique combination of best practices, hands-on advice, and current events.

Beyster Institute: ESOPs for Bankers on March 24

The Beyster Institute at UC San Diego will offer an online training course to familiarize bankers with the key aspects they need to work effectively with clients considering an ESOP. Visit their events page to learn more.

Stock Options Publication Open for Comment Through February 17

Santa Clara University's Certified Equity Professional Institute (CEPI) released a draft of its newest publication on guidance, procedures, and systems (GPS) for stock options and invites comments. The publication is available online and comments must be received by February 17.

ESCA Releases Its 2015 Annual Report

Employee-owned S Corporations of American (ESCA) released its 2015 Annual Report, describing its activities and accomplishments in 2015.

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