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The Employee Ownership Update

Loren Rodgers

April 15, 2016

(Loren Rodgers)

New Post-Dudenhoeffer Ruling on Private Company ESOPs

On March 28, the federal district court for the northern district of Mississippi applied the Supreme Court's ruling in Fifth Third Bancorp v. Dudenhoeffer to an ESOP in a closely held company. In the case, Hill v. Hill Brothers Construction Co., the court dismissed the plaintiff's claims of a breach of fiduciary duty by the plan's trustees, holding that the plaintiffs had not shown that there was an alternative action that "a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [plan] than to help it."

This "alternative action" standard is based on the Supreme Court's 2014 ruling in the Dudenhoeffer case, which involved a public company. Sharion Aycock, the district court judge in the Hill Brothers case, however, noted that although all of the Supreme Court's examples in Dudenhoeffer concerned public company situations, "that does not necessarily preclude the application of the alternative action pleading standard to closely-held entities."

In their analysis of the case, Charles Dyke, Matthew Goedert, and William Lisa of Nixon Peabody observe that another district court, the northern district of Illinois, applied Dudenhoeffer to a closely held company in its 2015 ruling in Allen v. GreatBanc Trust. They conclude that although it is unknown whether other district courts follow the lead of these two cases, "they nonetheless may find good reason to conclude in principle that plaintiffs in private-company ESOP cases should be held to an 'alternative action' pleading standard."

Employee-Owned Companies on the List of Favorite Grocery Stores

The results of a survey answered by more than 10,000 consumers listed Americans' favorite grocery chains, and several employee-owned companies are on the list. The research, by Market Force Information, listed three employee ownership companies: Publix Super Markets at no. 2, Hy-Vee at no. 4, and H-E-B at no. 7.

The top company on the list, Wegman's, is family-owned, but made news in 2015 as a strong endorser of a bipartisan bill, the Encouraging Employee Ownership Act, sponsored by Sens. Pat Toomey (R-PA) and Mark Warner (D-VA). Paul Speranza, vice chairman of Wegmans, said that the bill would allow Wegmans and other "privately-held companies to provide ownership opportunities to employees and is important because it helps companies like Wegmans to attract and keep the very best talent. It also allows companies like ours to protect confidential business information."

NCEO Annual Conference Sets Another Record

A record-setting 1,683 people attended the NCEO's 2016 Employee Ownership Conference in Minneapolis this week. This year's conference featured keynote speeches by trend-setting author Bo Burlingham and by Timothy Hauser of the US Department of Labor, who also hosted a conversational Q&A session with attendees. Other highlights of the conference include:

An Employee Ownership Version of the Gig Economy

Uber and Lyft are the best known companies in the so-called "gig economy," in which work is done by independent contractors on a job-by-job basis and mediated by mobile technology. Commentators, including the NCEO, have long suggested that the same technology could be adapted to stable employment and employee ownership, and a new company, Juno, is now striving to test that argument.

Juno's "citizen drivers" will earn more shares the more they drive, and the company is setting aside half of its initial shares for drivers. Juno's founder, Talmon Marco, says "We say happy drivers make for happy riders. The fact that drivers love Juno and that they are owners in the business will significantly affect the kind of service customers get." Juno's drivers will also be employees and entitled to employment benefits and protections.

Analysis of Public ESOP Companies Looks at Risk of Large Stock Value Losses

A new analysis by Francesco Bova, a professor of finance at the University of Toronto and a Beyster Employee Ownership Fellow, provided the first specific data on how often large public companies with ESOPs saw their stock decline by over 50%. The analysis used data on publicly-traded ESOP firms from 1999 to 2009. It compared the propensity for ESOP firms in 1999 to experience losses of greater than 50% by 2004 (a five-year period over which the market was generally expanding), with the propensity for ESOP firms in 2004 to experience losses greater than 50% by 2009 (a five-year period over which market returns were generally decreasing).

He found that when the five-year term covers a period of market expansion, the most likely number of firms that experience a large loss was zero or one out of ten firms. Conversely, when the five-year term encompassed a period of recession, the most likely number of firms that experienced a large loss is two out of ten firms. The probability of a company losing 50% or more of its value ranged from 5.6% to 22.6%, depending on the year. When a large loss occurred (i.e., a loss of greater than 50%), the median large loss for companies in that group ranged from 69% to 86%. The analysis was done for StockShield, which has created a product to allow ESOPs to protect against large losses over five- or ten-year periods.

Remembering David Ackerman

David Ackerman of Morgan Lewis, who passed away this year, was one of the most respected NCEO authors and most loved advisors in the ESOP community. We have been touched by people's desire to remember him. Anyone who chooses may support the David Ackerman Remembrance Fund, which will support projects to increase the number of ESOPs in the United States. You may also read a letter from Ken Serwinski remembering David and introducing the idea of the fund.

The NCEO's 2015 Annual Report

The highlights of the NCEO's ongoing and new projects is available in our 2015 annual report.

Author biography and other columns in this series

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