HOMESTEAD: For ESOP Association Legislative & Regulatory Committee - Requested Sliding Scale ESOP tax benefits Proposal and Proposals to provide employees and community a stake in exchange for tax investment via Government bailouts, and

[Deborah Groban Olson <dgo@esoplaw.com>]

Dear Dave:

        

This is
following up the November 1, 2001 ESOP Association Legislative and
Regulatory Committee's request for my Sliding Scale ESOP Tax Benefit
Proposal (Appendix C.)  I have taken the opportunity to
provide you with several other favorite legislative ideas I've been
developing lately, as well as a copy of the "Bold Steps Towards
Ownership for All" Chapter of the forthcoming policy book by
COG.  Each Appendix is the kernel of a legislative idea, not fully
fleshed out. If the ESOP Association is interested in seeing any of these
developed further, I will be happy to oblige. I would be delighted to
work with Committee members on any of these, and warmly invite  all
Committee members to join the COG Homestead discussion (see below for
instructions), which deals with new ownership policy ideas.

        

 The
Sliding Scale ESOP idea is developed in more detail in my article
"ESOPs for People, Not for Wall Street" in 1993 Employee
Ownership Journal of Law and Finance 5.

        

I also
mentioned to some of the Committee members  that I would like to
work on developing an employee ownership system that shields some of the
retained earnings for the benefit of future employees and the community
by retaining it in joint ownership, as in a coop, but without some of the
restrictions of a coop, in order to alleviate some of the problems of
repurchase liability which cause employee ownership to be a temporary
status for most companies.

        

Most
recently I've been developing I am working on developing "The
Fair Exchange Investment and Taxpayer Protection Act of 2001"
Appendix A, in particular to provide some benefit to taxpayers as
corporations increasingly appeal to the Congress to invest in them.The
airline industry sought and received a Congressional bailout from the
huge loss it incurred due to the terrorist attacks that closed the
airports and greatly diminished air travel after 9/11/01.This is an
understandable plea to which Congress should respond to positively.
However, it immediately raises the following question. If Congress uses
taxpayer money to help a private company, what upside return should
taxpayers receive? If the taxpayers participate in a company's pain, they
must also participate in its gain by receiving equity. Below are three
preliminary proposals to deal with this problem (Appendices A, B and C
contained within this email).

        

I
understand that the bailout package is $15 billion, while the market
capitalization of the entire US airline industry is only $22 billion.
Thus, the $15 billion investment should provide the investors with a
substantial stake.  It also appears that the airlines and insurance
companies may be only the first of a number of industries to come to
Congress for assistance in reaction to forces unleashed by the events of
9/11/01. Thus, it is important that Congress have a coherent long range
policy to deal with the implications of these investments, and that it
utilize this extraordinary opportunity (however, sad its origin) to
protect citizen based democracy from the more egregious aspects of market
capitalism.

        

Congress
insisted on the employees (who took a pay cut) receiving stock valued at
approximately a 15% interest in Chrysler, when they provided a bailout to
help that company avoid bankruptcy under the Chrysler Loan Guarantee Act
of 1979. (See D. Olson, 1982 Wis. L.R. 729 at 775-777
http://www.esoplaw.com/WisLR%20complete.htm
) Had the employees retained that ownership stake, there might have been a very different outcome to Daimler's recent ill-fated purchase of Chrysler, that has harmed Chrysler and led to massive layoffs of US workers.

        

The following link is to the Fair Exchange Proposal (also called "Stock or Equity Quid Pro Quo") in the Capital Ownership Group (COG) paper Ownership for Everyone.http://capitalownership.org/PapersMay2001/Homestead.htm .Attached is the most recent version of that paper entitled Bold Steps Towards Ownership for All., which contains over 30 new policy ideas on broadening ownership, including several of those appended herein. If you are interested in pursuing, please contact me at dgo@esoplaw.com. You can connect to an ongoing discussion of this and related ideas by joining the COG Homestead by registering at   http://capitalownership.org/register.html .The Capital Ownership Group (COG), a non-profit network of professionals, business, labor and government leaders and staff, academics and activists on six continents, works to broaden ownership to deal with the negative effects of globalization. Programs include: 1) On-line conference center http://cog.kent.edu (hosting 12 working groups with over 585 participants) enabling collaborative research and a forum for development of policy proposals and implementation efforts (The site is navigable in English, Spanish, Hungarian, Russian and Chinese.); 2) On-line library http://cog.kent.edu/library.html including research reports, case studies, proposed legislation; 3) Creation and publication of the policy working groups’ work available in the forthcoming book Ownership for All  (summary now available on-line); 4) International strategy and policy meetings for labor, business, academics and activists; 5) A global outreach program expanding links and collaborative relationships with influential think tanks,  constituency organizations, governments, agencies to raise the profile of productive asset ownership and control issues;  6) Expanding the number and narrowing the focus of working groups to enable ongoing concrete action.  COG has responded to over 806,380 data requests from people in 115 countries. COG’s mission and goals can be found at http://cog.kent.edu/mgo.html). COG is hosted by the Ohio Employee Ownership Center at Kent State University.


Appendix A - Draft #1  Fair Exchange Investment and Taxpayer Protection Act of 2001

(Note: This is still in idea form and not yet in the form of legislation. If there is interest in the idea, I will do what is necessary to get it into legislative form.)


 Article I - Preamble

        

“Whereas terrorist acts on Sept.11, 2001 caused great damage and new expense to certain private businesses, including without limitation, airline companies, airport and transit authorities, building owners and leaseholders, insurance companies, vendors to the transit industry; and

        

Whereas, similar problems may arise for the pharmaceutical, food processing, package delivery and many other types of businesses; and

        

Whereas such industries are seeking investment from the US government in the form of grants, loans and loan guarantees, to handle the damages and risks of this new situation; and

        

Whereas many of the firms seeking assistance own or operate assets both within and outside the United States; and

        

Whereas, many individual taxpayers are also harmed by loss of employment due to circumstances causing many of these companies to seek government grants, loans and/or loan guarantees, tax abatements, favorable licenses, etc. (hereinafter referred to as “government largesse”), and

        

Whereas, the primary purpose of the government is to protect had defend the rights of its citizens to life, liberty, property and the pursuit of happiness; and

        

Whereas, corporations, unlike individuals, may be legal persons, but do not hold citizenship in any country;

Article II

NOW THEREFORE BE IT RESOLVED that the Congress of the United States shall require that in exchange for any grants, loans or loan guarantees made for or on behalf of any for-profit business entity (hereinafter “ the Business”) by the United States Government or any of its agencies (hereinafter “the Government”, the Federal Equity Exchange Board  (hereinafter “FEEB”) shall obtain contracts under which the Government, the Businesss’ employees and all current U.S. taxpayers would participate in gain of the participating Business or its security holders through use of common or preferred stock and instruments such as warrants and stock options or other appropriate equity instruments as follows:

A) In exchange for any direct grant of funds to the Business, the Business shall create an employee stock ownership plan meeting the all the requirements of IRC Sec.409 (a) (with the exceptions noted in paragraph B below) and shall contribute qualifying employer securities, as defined in IRC Sec.4975 (e)(7) and (8), with fair market value, as defined in ERISA 29 USC Sec. 1108(e) equivalent to the value of the grant made, and referred to hereinafter as a Fair Exchange ESOP (hereinafter “FEESOP”).

B) A FEESOP shall include the following features in addition to the requirements noted in paragraph A above, and (where these conflict with IRC Sec. 409(a), the requirements of this paragraph shall take precedence. These requirements include:

1) The majority of the Trustees of the FEESOP shall be elected on a one vote per person basis by the FEESOP participants pursuant to procedures and regulations established by the FEEB.

2) Allocations to the individual accounts of individual participants in a FEESOP shall be made from one half of the contributed stock;

3) The other half of the contributed stock shall be allocated to the “FEESOP Joint Trust”. The FEESOP Joint Trust shall hold its interest in the FEESOP stock for the benefit of current and future employees and the local community. Its Trustees shall be elected as follows: 1/3 by shareholders; 1/3 by the employees on a one vote per person basis; and 1/3 shall be comprised of representatives of local governmental, civic or non-profit organizations nominated by the shareholders and approved by vote of the employees on a one vote per person basis.

C) In exchange for any direct loan of funds or provision of loan guarantees to any Business by the Government, the FEEB shall obtain contracts under which the Government, the Businesss’ employees and all current U.S. taxpayers would participate in gain of the participating Business or its security holders through use of common or preferred stock and instruments such as warrants and stock options or other appropriate equity instruments.

D) The FEEB’s purpose is to utilize the lending capacity of the federal government to accomplish and balance two goals:

1) Broadly distribute “meaningful ownership” among U.S. citizens in the same way that the Homestead Acts of the 1860’s made many citizens landowners;

2) While lending and making loan guarantees to stabilize US businesses and the US economy;

E) The FEEB shall include five members appointed by the President with the advice and consent of the Senate. However, there must be at least one each from the financial community, one from labor and one from an employee owned business. In carrying out the goals stated in paragraph C above, the FEEB may create revolving loan funds to further enable employee or community ownership programs with repaid loan funds.

F) “Meaningful ownership” shall be interpreted by the FEEB, but shall include both voting and property rights.


Appendix B - Fair Exchange Proposal - Equity Quid Pro Quo Proposed Legislative Language
“In exchange for government benefits granted to a business for providing jobs, or government grant of licenses or permits enabling extraction of natural resources or use of collective resources, such as air and water for business purposes, the business shall provide a quid pro quo at fair market value to the commonweal.”

Definitions of these terms:

 “Commonweal” means private or public entities, including non-governmental trusts, employee trusts, community trusts, stock funds, investment funds, co-operatives, for-profit and non-profit corporations, and other entities provided they met specific tests of bona fide interest in protecting the long term economic, social, ecological and/or cultural interests of the local citizens. These entities should provide the community receiving the benefit with individual accounts to provide citizens with:

·       wealth creation for their families;

· ability to withdraw and use the funds (with parameters such as those used by 401(k)s to incentivize a long term investment horizon for such funds);

·       the ability of those citizens to vote for the leadership of the trust and to take action to formulate the policies of the trust.

When developed in greater detail this definition shall provide mechanisms for responsible parties, such as labor-venture funds (such as those in Quebec and Manitoba fashioned under the Canadian labor-sponsored investment fund laws), community development financial institutions, credit unions, and other certifiably locally controlled financial institutions to hold the quid pro quo stock responsibly and accountably.

 “Government benefits” means any tax deduction, abatement, grant, government subsidized or guaranteed loan, license (e.g. banking and broadcasting), lease, concession, or contract, preparing and/or providing parcels of land, government contracts, and favorable utility rates, use of non-renewal resources, etc.

“Fair market value” has its current definition under the US Internal Revenue Service and the US Tax Court.

 “Quid pro quo” means corporate common stock with the greatest voting and dividend rights or preferred stock convertible into such common stock or its equivalent in cash.”

As this is an untried idea, several different versions and methods emerged in the COG discussion regarding the types of benefits and community equity that should be sought. They are provided in the main text of this chapter in the section on this Fair Exchange Proposal. 

Appendix C: Proposed Worker Bill of Rights in ESOPs - Sliding Scale Tax Incentives

•       Reinstate the previously repealed ESOP lender deduction (IRC Section 133) contingent upon the following requirements, any or all of which may be waived if the ESOP is created through collective bargaining. Either (a) more than 50% of the voting stock of the company must be allocated to ESOP participants; or (b) where the ESOP owns more than 30% but less than 50% plus, the plan must provide that the ESOP participants, through the ESOP committee, direct the trustee on how to vote unallocated shares (in proportion to how they vote their allocated stock or, as a block, the same as the majority of allocated).

•       

The ESOP committee appoints the ESOP trustee.

•       

The ESOP committee is either (a) elected by the ESOP participants on a one-participant/one-vote basis; or (b) appointed by management and representatives of all collective bargaining units whose members are or will be plan participants with proportional representation of each bargaining unit, and each non-represented group of employees covered by the plan, so that the ESOP committee membership corresponds to the different classes of participating employees.

•       

Participants get either (a) voting pass-through on all shareholder issues, including voting for the board of directors, or (b) the right to direct the ESOP committee through their votes. This prerogative, however, may be deferred during the term of an ESOP loan pursuant to loan covenants.

•       

Voting of ESOP stock shall be on the basis of (a) one participant, one vote or (b) one share, one vote.

•       

ESOP appraisals are made available in the same manner as the ESOP plan, and the summary plan description states that copies are to be made available to plan participants upon request for copying cost. 

These changes presume a corresponding exception be made in the Employee Retirement Income Security Act of 1974 (ERISA) to permit employee owners to direct trustees to vote allocated and unallocated shares as directed, without putting them in the fiduciary bind (created by current law) of having to override those directions if they do not believe them to be in the participants’ best interests.

Make ESOP tax benefits for the corporation and selling shareholder available on a sliding scale based on the amount of voting stock meeting the above requirements, or contributed to the plan pursuant to a collective bargaining agreement. For example, if taxpayers sell or contribute 10% of their stock to an ESOP, they would receive 20% of the ESOP benefits for which they were otherwise eligible. (The term "taxpayers" is used to refer to any selling shareholders, estates, or corporate plan sponsors.) If taxpayers sell or contribute 20%, they would get 40% of the benefits, etc. The benefits would increase so that once taxpayers sell or contribute 50% or more, they would be eligible for 100% of the ESOP benefits.

If Congress is going to encourage employee ownership, employees should get enough control over investment, disinvestment, employment, and other significant corporate policies to make employee ownership a meaningful method of anchoring business in local communities.

The requirement that the Section 133 lender interest exclusion was only available to plans where over 50% of voting stock was in an ESOP was a clumsy method for addressing Congressional concerns. This requirement, simultaneously, impeded the creation of some good employee-driven ESOPs, which need to attract senior equity partners to finance a deal, and encouraged others who might set up ESOPs to turn to other vehicles, like stock purchase plans, that had fewer employee rights. The above-outlined sliding scale would better meet the country’s needs for locally owned businesses and tax revenues.

Additionally, by inadvertence, Section 133(b)(7) was drafted so that it did not allow a Section 133 loan to a company providing one participant, one vote. This section should be amended in the next tax act to add a reference to IRC Section 409(e)(5). IRC Section 133(b)(7)(A) would then read:

"The employee stock ownership plan meets the requirements of Section 409(e)(2) or 409(e)(5) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and . . .”

Best regards,
Deb Olson

Attachment: Bold Steps Towards Ownership for All dgo jl 92301.doc
Description: Binary data

Deborah Groban Olson
Executive Director
Capital Ownership Group (COG) 
COG web site - http://cog.kent.edu
Email: cog@kent.edu

c/o Atty. Deborah Groban Olson ,of counsel to
Jackier, Gould, Bean, Upfal & Eizelman, P.C.
1021 Nottingham Rd.
Grosse Pointe Park, MI 48230
Phone: (313) 331-7821 
Fax: (313) 331-2567 
Email: dgo@esoplaw.com
Web site: www.esoplaw.com