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The Employee Ownership Update

Loren Rodgers

March 1, 2019

(Loren Rodgers)

Small Business Administration Issues Guidance for Loans

On February 15, the Small Business Administration issued SOP 50 10 5(K), which will take effect on April 1, 2019.

The provisions allow SBA-backed loans to finance "any transaction costs associated with purchasing a controlling interest in the employer, but not costs associated with setting up the ESOP or cooperative" and mirror loans to create an ESOP. The guidance also specifies that "any seller who remains as an owner, regardless of percentage of ownership, must provide their guaranty." (The above is from Chapter 2, paragraph V.H.1-2.) The guidance also appears to deny the use of the expedited preferred lender program for employee ownership transitions, although the guidance only mentions loans for cooperatives, not for ESOPs. The implication is that the SBA will have to approve each loan on a case-by-case basis (see here).

The guidance was developed in response to the passage of the Main Street Employee Ownership Act. It achieves much but not all of the stated intent of the Act. For example, the Act intended to allow SBA-backed loans via the preferred lender program, but this intent does not appear to be met by the guidance.

The SBA Information Notice is here, and the full document is here.

SBA Begins Public Education About Employee Ownership: Want to Get Involved?

Another feature of the Main Street Employee Ownership Act is that the SBA now is to educate the public about worker cooperatives and ESOPs. Several local SBA offices have started host programs. The Washington, D.C., metropolitan area SBA district office will host a meeting, How to Sell Your Small Business to Those Who Already ARE Your Small Business, on March 22 at the employee-owned company Mid South Building Supply.

If your company would like to explore working with your local SBA offices, the NCEO is happy to help! We have agendas, slide shows, contacts, and template text you can use to make the process quick and easy. Contact Tim Garbinsky (TGarbinsky@nceo.org).

DOL Files Amicus Brief in Support of Lifetouch Plaintiffs

In Vigeant v. Meeks, participants in the Lifetouch ESOP are suing over the valuation of Lifetouch shares. On February 27, the Department of Labor filed a brief in support of the plaintiffs. The brief argues, in part, that reviewing the annual stock appraisal is not on its own sufficient for trustees to fulfill their duty to monitor the plan's investments, and also disputes the heightened pleading standard the judge applied. The suit was dismissed by the Minnesota district court, and the plaintiffs are appealing that dismissal to the 8th Circuit Court.

Federal Judge Upholds Plaintiffs' Interpretation of Time Limits to File ERISA Suit

Employees at Adams & Associates sued over a 2012 ESOP transaction, saying that the ESOP had overpaid. The company responded that the suit was filed after the expiration of the three-year limitation for filing a lawsuit under the Employee Retirement Income Security Act (ERISA), since the suit was filed more than there years after the company's government filing. The judge ruled that the clock begins on the three-year period when the participants have "actual" rather than constructive knowledge of the alleged breach. Various circuits have different interpretations of the three-year limitation period.

IPOs by Uber and Lyft: Employee Ownership and the Gig Economy

In a February 28 Wall Street Journal article, Maureen Farrell reported that both Uber and Lyft plan to allow their most active drivers to participate in their initial public offerings (IPOs). Uber, which expects its IPO in May or June, anticipates a program for "a significant portion of its 3 million active drivers and couriers globally either a cash bonus or the option to use that cash to purchase shares at the IPO price." The program is expected to be worth hundreds of millions of dollars.

Lyft promised to release more details about its plan today (March 1). Lyft is expected "to give its drivers who have logged at least 10,000 rides on the platform $1,000 that can be kept or used to buy the company's IPO shares," and drivers with 20,000 rides would be eligible for $10,000 in cash or stock. Lyft's plan would apply to a minority of its drivers.

Writing in the National Review, Kevin Williamsom praised these plans, saying that employee ownership was a practical way for the right to respond to efforts by Democratic presidential candidates to use the tax system to create higher incomes for low and moderate-income Americans. "Higher income changes things today; higher wealth can change things for a lifetime, or even across generations," he wrote.

Williams went on to say that promoting employee ownership is an example of a program "that linked the ownership of real assets to work...Employers could be an important part of that, provided that we move away from the employee stock-purchase model that encourages worker-investors to put most of their savings into the stock of their employer, which creates a compound risk for them — putting them at risk of losing both their savings and their income simultaneously if the company fails." Oddly, the Uber program does encourage employees to use their own after-tax money to buy stock, unlike ESOPs, which are almost always funded by employers.

A lesser-known ride-sharing company, Bounce, gives its drivers 1,000 stock options when they sign up, and more at various milestones, each batch with its own 25-month vesting schedule. Every month a driver is active, the driver vests in 4% (1/25th) of her or his options.

Forty-Eight Percent of 2019 100 Best Companies to Work for Have Broad-Based Ownership Plans

Forty-eight percent of the stock corporations on the Fortune 2019 Best 100 Companies to Work For have some kind of broad-based employee ownership plan. The percentage is just slightly less than what is has been in prior years. Twenty of the organizations on the list are not stock corporations, mostly law and accounting firms and nonprofits. The percentage is just slightly less than in prior years. Companies have to apply to the Great Place to Work Institute for the award, and the applicants skew toward technology firms, professional firms, and large nonprofits. Companies have to have at least 1,000 employees to apply.

Of the winners this year, three (Burns and McDonell, Publix, and R.W. Baird) are majority employee-owned. Two others (Sheetz and David Weekly Homes) have minority ESOPs. Seventeen of the companies have board-based equity award programs, mostly restricted stock units or stock options, and seventeen others have only employee stock purchase plans.

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