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The Employee Ownership Update

Loren Rodgers

May 16, 2016

(Loren Rodgers)

Missouri Legislature Passes Pro-ESOP Bill

On Friday, the Missouri legislature passed HB 2030, the Stock Ownership Tax Deduction Act. The bill, which passed 134 to 13 with strong support from legislators in both parties, would allow a deduction for 50% of the net capital gains on qualified sales of stock to an ESOP. Gov. Jay Nixon (D) is deciding whether to sign it into law. [Note: we previously mis-identified Gov. Nixon as a Republican.]

Worker Ownership in USA Today

In his article More worker-owned businesses are sprouting, reporter Paul Davidson starts with yogurt-maker Chobani's decision to grant shares to employees, but notes "the two most prominent ways to give workers significant stakes—employee stock ownership plans (ESOPs) and worker cooperatives—go quite a bit further." The story covers several examples of employee-owned companies, including Paper Machinery, Harpoon Brewing, and Eureka Casinos.

Fifth Circuit Affirms Lower Court in Perez v. Bruister

On May 3, the Fifth Circuit Court of Appeals in Perez v. Bruister, No. 14-60811 (5th Cir. 2016) upheld a district court ruling (Perez v. Bruister, 54 F. Supp. 3d 629 [S.D. Miss. 2014]) in favor of the Secretary of Labor, who was the plaintiff. The case involves three stock sales in 2004 and 2005 to an ESOP, collectively amounting to just over 50% of the shares of the company Bruister & Associates, which went out of business in 2008. Although it clarified some questions of law, the circuit court called the district court's ruling a "thorough and conscientious opinion" (p. 2) and observed that the "trustees' actions were not those of prudent men" (p.18).

The ESOP trustees consisted of Bruister (the original owner who sold to the ESOP) and two others: a Bruister employee named Smith and the company's outside CPA. The CPA was dismissed from the action during the appeal. Although Bruister abstained as a trustee from voting on the transactions, the Fifth Circuit agreed with the district court that Bruister could be held to fiduciary standards because he acted as a fiduciary by influencing the ESOP transactions.

The court affirmed the finding that the defendants breached their fiduciary duty of loyalty to plan participants and beneficiaries by being affected by Bruister's self-interest: Bruister, among other things, fired the ESOP's counsel and influenced the valuation. The other trustees were concerned with Bruister's interests, and Smith testified she made decisions for the plan by considering "what was best for everyone, including Bruister" (p. 14).

The court also agreed with the district court that the trustees had failed to meet the duty of care with regard to the appraisal, noting, for example, a failure to investigate the appraiser's qualifications, failure to provide sufficient information to the appraiser, and failure to review the appraisal report. The defendants argued that the ESOP transactions were made for adequate consideration because the valuation was lower than that of a trial expert whose opinion was partially accepted by the district court. The Fifth Circuit rejected this "all's well that ends well" argument, noting that "for liability under ERISA, the critical question is whether there was a conflict of interest, and whether it was avoided because the trustees' decisions were 'made with an eye single to the interests of the participants and beneficiaries'" (p. 14).

The circuit court also upheld the district court's determination of damages to be paid by the defendants as depending on the amount the ESOP overpaid for the stock. The amount of overpayment was determined by using three separate valuations based on information available at the time of the original transactions. The district court averaged the three, a method argued against by both the defendants and the lawyers for the Secretary of Labor.

Employee Ownership in New Zealand Startups

A recent survey by the New Zealand Venture Investment Fund and the Angel Association of startup firms backed by angel investors found that the vast majority (88%) use employee stock plans, most of which were stock option plans. NZVIF Investment Director Chris Twiss said "96 percent of the CEOs who responded said that they would implement ESOP plans [meaning employee stock plans of various types, not US-style ESOPs] in future organisations, which suggest the plans are working well and seen as a really important part of a start up's armoury."

Surdna Foundation Releases Report on Employee Ownership

The report, Ours to Share: How Worker-Ownership Can Change the American Economy, explores and evaluates various forms of employee ownership with a focus on worker cooperatives and ESOPs, and then discusses ways such structures might become more widespread.

Videos on Employee Ownership Companies

Eileen Fisher, the founder of the firm of the same name, discusses in a 4-minute Inc. magazine video (available on Inc's site and at NCEO's esopinfo.org) in which she talks about why she choose employee ownership. She remembers that a potential buyer said she wanted to buy Eileen Fisher because "we have a mandate to grow 10% a year, and we can't do that unless we buy companies." Fisher came to believe that outside buyers "were just interested in money and numbers, and what they could get out of it, [rather than] what they could give to it."

Zachary's Chicago Pizza and its employee-owners are featured in a new video from Visit California.

Forbes Blogger to Focus on Employee Ownership

Darren Dahl, a contributor at Forbes, will begin a new focus for his blog writing: employee ownership. The first post in the series is an interview with the NCEO's Corey Rosen. The interview covers the early years of employee ownership, a discussion of why there isn't more of it, and Corey's thoughts about the definition of employee ownership: "I think of employee ownership as something that purposely links literal ownership with a sense in the company that that sharing ownership is part of who they are."

Author biography and other columns in this series

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