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The Employee Ownership Update

Loren Rodgers

September 1, 2016

(Loren Rodgers)

NCEO Announces the 2016 Employee Ownership 100 List

The NCEO's 2016 Employee Ownership 100 list includes the nation's largest companies that are at least 50% owned by an employee stock ownership plan (ESOP) or other broad-based employee ownership plan.

The great majority (92%) of the companies on this list have ESOPs, and several of them have more than one plan. Other vehicles for employee ownership on this list include profit sharing plans invested in company stock, stock purchase plans, 401(k) plans, and a worker cooperative.

Many are 100% employee-owned. Seven companies are new to the list this year, and the companies featured on the list collectively employ approximately 619,000 people worldwide. This year the smallest companies on the list have 1,100 employees. In an analysis of ESOP companies on the list, an average of approximately two-thirds of employees participated in the plans.

DOL Argues Dudenhoeffer Rule Applies Only to Public Companies

The Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer eliminated the presumption of prudence for ESOP fiduciaries and replaced it with a new set of standards requiring that plaintiffs show plausible alternatives for fiduciaries to offering, holding, buying, or selling company stock. That has proven a very difficult standard in public company cases because courts have assumed that market prices incorporate all current information, including risks. Alternatively, plaintiffs could charge that fiduciaries had inside information that should have led them to act, but that often runs afoul of securities laws. The ruling talked entirely about public companies, and it was unclear that it applied to private companies. Recently, in two cases, district courts have said it could apply and used that to rule for defendants, saying plaintiffs did not assert a plausible course of action under the Dudenhoeffer doctrine.

On appeal in one of these, in Allen v. GreatBanc Trust Co. No. 15-3569 (7th Cir. Aug. 25, 2016) (text of decision), the Department of Labor argued successfully that the rule should apply only to public companies. The court ruled that plaintiffs could continue their case on the basis on issues other than plausible alternatives, specifically that the valuation was improper. The position and decision are notable for their implications for private companies. The presumption of prudence arguably never was an issue for private company litigation, and the doctrine only came up twice in the 26 years that the NCEO has been tracking litigation. If the Dudenhoeffer rule does not apply to private companies, then the legal landscape for private companies may, in effect, look much like it did before Dudenhoeffer.

The DOL position is worth quoting at length (see the full text of the DOL's brief):
"The Supreme Court in Dudenhoeffer required plaintiffs to plead the existence of "special circumstances" in a very specific class of cases: those involving allegations that a fiduciary should have known from "publicly available information alone" that a "publicly traded stock" was overvalued. Dudenhoeffer, 134 S. Ct. at 2471. And it imposed this requirement for a very specific reason: because fiduciaries may, as a general matter, assume that the market price of publicly-traded stock is an "unbiased assessment of the security's value," meaning that only in "special circumstances" would it be plausible to expect a fiduciary to realize that the presumptively efficient market, in fact, was wrong. Id. at 2472. In contrast, plaintiffs here allege that GreatBanc imprudently purchased stock in a privately-held company that does not trade on any stock market, and whose value can be ascertained only through the good-faith and painstaking due diligence of its purchaser. Plaintiffs do not need to plead additional "special circumstances" under Dudenhoeffer in order to state a claim that GreatBanc failed in this regard."

Strong Week for Media Coverage of Employee Ownership

Articles and commentary about different forms of employee ownership appeared in a variety of media outlets in recent days. Some highlights of the coverage include:

Corey Rosen's Why You Should Let Your Employees Own Your Company in Ozy. Interestingly, this article was picked up today by Yahoo! Sports.

The National Law Review published an article by Corey Rosen about recent decisions that affect litigation involving employer stock.

Fox Business wrote about equity awards and what employees should ask their employers about them.

The Cleveland edition of Crain's wrote one of the stories that built off the release by the NCEO of the 2016 Employee Ownership 100 list, in this case with an article about Davey Tree.

Forbes blogger Darren Dahl wrote about state-by-state variation in ESOP prevalence.

Marjorie Kelly wrote an op-ed in The Hill about the potential role for employee ownership in reducing income inequality.

China Takes a Tentative Step Toward Employee Ownership

Over the past several years, China has frequently taken steps toward encouraging equity compensation plans, especially among state-owned enterprises. In 2013, the Communist Party's Central Committee passed a guideline on the reform of subsidiaries of state-owned enterprises that includes employee ownership, and on August 18 the State Council fleshed out that guideline. A potential impact would be equity compensation programs for managers at 200 state-owned enterprises by the end of 2018, when the program will have a progress review.

ESCA-NCEO Paper on State Governments and Employee Ownership

Employee-owned S Corporations of America (ESCA) and the NCEO released a paper with new research and policy recommendations for policy makers in state governments. The paper, Economic Growth through Employee Ownership (PDF), is a concise summary of research, how ESOPs work, an overview of potential state-level policies to support ESOPs, and original research on the state-by-state potential for ESOPs.

September Is the Month to Propose Conference Topics

Every year, people contact us hoping to submit topics for our annual conference after the deadline has passed. To get your proposal in, it must be submitted by October 3. More information about speaking at the conference and the other 2017 meetings is now online.

Rocky Mountain Employee Ownership Center: New Hire

The Rocky Mountain Employee Ownership Center continues to expand its capacity to promote employee ownership by hiring a new staff member, Paul Bindel.

Beyster Institute Course on Employee Ownership Management

The Beyster Institute, part of University of California at San Diego's Rady School of Business, will host its annual on-site program for owners, executives, and managers of employee-owned companies on October 16 to 19.

Author biography and other columns in this series

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