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The Employee Ownership Update

Loren Rodgers

December 17, 2018

(Loren Rodgers)

Sixth Circuit Sets More Pro-Plaintiff Standards Under Dudenhoeffer

The Sixth Circuit Court of Appeals reversed and remanded a lower court ruling (in Jander v. Retirement Plans Committee of IBM) that found that the trustees of IBM's ESOP were not in violation of their fiduciary duty when they failed to disclose that a major division of the company was overvalued. The lower court had ruled that plaintiffs failed to show disclosure would not have done more harm than good.

The Sixth Circuit, however, ruled that this standard is too strict. The court said the Supreme Court's 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer ("Dudenhoeffer") ruling laid out two conflicting standards for determining whether a fiduciary should have concluded an action would have done more harm than good. The first is whether an average fiduciary would have made that conclusion; the second is that any fiduciary could have made that decision. Here the court chose not to decide which standard applied, saying that the plaintiffs met either test.

The plaintiffs had convincingly argued, the circuit court said, that early disclosure and correction would not have resulted in more damage to the stock price than ultimately resulted when the division in question was sold and information came out about the accounting irregularities and other issues the division faced. The fiduciaries, the plaintiffs argued, could have taken action to correct these issues earlier, and disclosed them to the market. In a presumably efficient market, the court said, the price would ultimately reflect the problems anyway. In light of all this, the court said the plaintiffs had made a sufficient plea to require remanding.

National Survey of Worker Cooperatives

In The 2017 Worker Cooperative State of the Sector Report (registration required), the Democracy at Work Institute and the U.S. Federation of Worker Cooperatives share the results of their survey of worker cooperatives. The report concludes that there are 450 documented worker cooperatives employing over 6,700 people and generating annual sales of $467 million.

The typical worker cooperative in the survey employs nine people, pays an average wage of $15.82 per hour, and generates $589,000 in annual revenue. The top geographic concentrations of cooperatives identified in the report are the San Francisco Bay Area, New York City, and Puerto Rico, and many cooperatives are also found in rural areas. Most worker cooperatives (69% of survey respondents) were established as coops, and another 25% were converted to worker cooperatives from other forms.

There is no central data collection on cooperatives, making this survey the most reliable information ever collected on worker cooperatives in the U.S. The results are based on survey responses from 105 businesses.

IRS Sets High Bar for Qualifying Equity Grants Under Empowering Employee Ownership Act

The 2017 tax bill contained provisions that allowed employees in private companies that provide nonqualified stock options and restricted stock units to at least 80% of their workforce to defer taxation on the awards until up to five years after termination. The law was intended to prevent employees from ending up with grants that were taxed even though they resulting shares could not yet be sold.

The law's restrictions have meant it has had limited appeal, but in Revenue Notice 2018-17, the IRS has set an even higher bar. Most important, the IRS followed the literal language of the law and required that 80% or more of the workforce get grants annually. Many smaller companies do not do that. Companies also have to escrow shares sufficient to pay the taxes that will be due in as much as five years, and employees have to agree to that. The IRS did let companies opt out of the tax treatment so that they do not inadvertently fall under it when, even though they qualify, they do not want to offer this potential tax benefit to employees. Bruce Brumberg of has written a useful, detailed explanation of the new regulations.

Research Preview: ESOPs and Economically Distressed Communities

In its January-February 2019 newsletter, the NCEO will unveil research that examines the impact of ESOPs on distressed communities as defined by the Distressed Communities Index created by the Economic Innovation Group. Fifty million people live in the 5,177 ZIP codes identified as distressed, and ESOPs in those ZIP codes employ over 150,000 people and made over $400 million in ESOP contributions during 2015. Stay tuned for more!

In Their Words: HDR

A company profile of HDR, a 10,000-employee engineering and architecture firms headquartered in Colorado Springs, contains two quotes to share.

Benton Barby, Marketing and Business Analyst: Employee ownership "means we believe in being good corporate citizens. It's how we respond to our communities, which includes sustainability and being environmental stewards. How we act affects how well we perform, so the little things our employees do add up to big things."

Ed McConnell, Program Manager: "Our success is because of our employees. We take a hard look when we add staff, that it's going to be a good fit for that individual, focusing on entrepreneurial spirit, because we're an employee-owned company. They're hired to do a job, but also to be a part of a large, diverse team, so we strongly promote the individual's professional goals, which provides a return to the organization."

Author biography and other columns in this series

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