The Employee Ownership Update
October 2, 2017
DOL, First Bankers Trust Enter into Settlement Expanding Fiduciary Process ObligationsIn Acosta v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD (S.D.N.Y. Sept. 21, 2017) (consent order and judgment), the U.S. Department of Labor (DOL) and First Bankers Trust Services (FBTS) agreed to a fiduciary process for future ESOP transactions where FBTS serves as a fiduciary. The settlement provides guidance that may be useful to other fiduciaries involved with ESOPs.
The settlement stems from a lawsuit in 2016 (Perez v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD [S.D.N.Y. Sept. 28, 2016]) in which a district court dismissed cross-motions from both sides in the case of Maran Inc., a company that experienced financial difficulties after it set up its ESOP. First Bankers said it hired a qualified appraiser and relied on its report, but the court said both that that in itself was insufficient to lead to dismissal but also that the DOL needed to show that the facts of the appraisal process demonstrated a lack of good faith.
The DOL was concerned that the valuation firm had worked for the company before, that FTSB did not get information about a prior offer to sell the company, and that the appraisal agreement stipulated the appraiser could rely on the projections of a Maran officer. The DOL alleged FBTS failed to negotiate over the offer.
The ESOP purchased 49% of Maran for $70 million in 2006. By 2009, Wal-Mart, its primary customer, stopped buying from Maran, and the stock dropped to zero. Wal-Mart later renewed the contract, and the stock was valued at $8.3 million.
The settlement expands on the DOL-GreatBanc fiduciary process agreement by adding a number of requirements concerning:
- Determining the independence of the appraiser
- Assessing the reliability of earning projections
- Assessing any prior valuations and/or offers
- Making sure any cession of control by the ESOP is compensated
Tax Reform and ESOPsThe tax reform framework issued by the Trump Administration, not surprisingly, does not say anything about ESOPs. It leaves to Congress the task of figuring out what special corporate tax benefits might be eliminated to help pay for the tax cuts the plan creates, but says that it eliminates a variety of business tax credits (it uses that word, not deductions) without specifying which ones.
The proposal does state that it "retains tax benefits that encourage work, higher education, and retirement" and encourages Congress to find ways to simplify the retirement system. One idea that Trump Administration officials have suggested in the past is to change the current deductibility of contributions into retirement plans and replace them with an emphasis on Roth-type plans, which are not taxed on withdrawal. That would generate tax revenue for the government now, but cost more in the future. It is not clear whether corporate contribution deductibility would change, though, and changes to retirement plan benefits as popular as 401(k) plans are notoriously difficult.
Poll Shows Support for Employee Ownership LegislationA new online survey of 800 respondents by John Zogby Strategies for Employee-Owned S Corporations of America (ESCA) found that 62% would like their own Congressional representatives to vote for a bill that is presently before both houses of Congress that would make it easier for owners of S corporations to transfer ownership in their companies to employees. Details of the survey are available from ESCA.
Stewards of the NewspaperIn an op-ed in the West Branch Times (Iowa), Jake Krob, the co-publisher, describes why he is comfortable selling the newspapers he owns to an employee-owned company. Newspaper owners, he says, are stewards. Krob and his partner, Stuart Clark, bought up local newspapers whose owners approached them because they believe that those newspapers needed stewards. Krob writes of their new owners, "The employee owners of Woodard recognize they are stewards for their newspapers. And that's the reason for this sale. Our communities deserve new stewards. So do our employees."
Round Table Pizza Sold: Employees Get WindfallRound Table Pizza, a California-based chain of over 440 pizza and, more recently, sports bars, has been both one of the largest pizza restaurant chains and one of the largest employee-owned companies. In 2010, issues with leases led to a Chapter 11 bankruptcy filing, but the company quickly reorganized and paid off the creditors in full ahead of schedule. It closed just 5% of its stores.
The company returned to strong profitability. In September, 2017, the company was sold to Global Franchise Group, which had earlier also bought employee-owned Hot Dog on a Stick. The stock price increased by about 19 times what it was in 2011, leaving many long-time employees with hundreds of thousands of dollars in their ESOP accounts.
2018-2019 Employee Ownership FellowshipsThe School of Management and Labor Relations at Rutgers University has announced it is accepting applications for fellowships in the upcoming academic year. Since its establishment, the program has supported over 120 academics in a variety of fields and across many institutions. A list of the researchers and their projects is available through Rutgers. The fellowships include a variety of awards, such as the J. Robert Beyster Fellowship, the Louis O. Kelso Fellowships, the George S. Pillsbury Fellowship, and the Kevin Ruble Fellowship for Conscious Capitalism.
Interested academics must apply by December 31. More information and application instructions are at Rutgers.