LEXIS-NEXIS® Academic Universe

September, 1982 / October, 1982

1982 Wis. L. Rev. 729

LENGTH: 52315 words

ARTICLE: UNION EXPERIENCES WITH WORKER OWNERSHIP: LEGAL AND PRACTICAL ISSUES RAISED BY ESOPS, TRASOPS, STOCK PURCHASES AND CO-OPERATIVES.

DEBORAH GROBAN OLSON *

* The author is a practicing labor, civil rights and employee ownership attorney who has represented unions, employees and community organizations, and is an adjunct professor of law and labor studies at Wayne State University in Detroit.

SUMMARY:
... Employee ownership of businesses through Employee Stock Ownership Plans (ESOPs or TRASOPs ) and co-operatives is increasingly attracting the interest of workers and unions, as current economic conditions decrease their ability to bargain for more material benefits and they seek new methods of ensuring job security. ... In fact, in many ESOPs, such as the Rath Packing ESOP, the pension plan was continued. ... Chrysler and the UAW further agreed in a letter of understanding attached to the plan that: 1) where the members of the ESOP board are unable to resolve a matter within their power, the matter shall be referred to the Chrysler Vice President -- Employee and Industrial Relations Staff and the Director-Chrysler Department UAW, who shall agree upon a method of resolution; 2) a plan participant employee-stockholder shall not be prevented from attending an annual shareholder meeting of the corporation as an observer, but any absences from work for attending such meetings shall be treated as any other excused absence, requiring prior approvals based on operating efficiency needs and the employee's absence record; and 3) employee claims pursuant to the plan are to be processed pursuant to a special claim review procedure set forth in the Summary Plan Description and are not subject to the grievance procedure under any collective bargaining agreement between the parties. ... A committee of UAW members and management employees then was formed to raise funds for the feasibility study. ...

TEXT:
[*732] I. INTRODUCTION: CHANGES IN THE BARGAINING CLIMATE REQUIRE NEW RESPONSES

Employee ownership of businesses through Employee Stock Ownership Plans (ESOPs n1 or TRASOPs n2 ) and co-operatives n3 is increasingly attracting the interest of workers and unions, as current [*733] economic conditions decrease their ability to bargain for more material benefits and they seek new methods of ensuring job security. Although these mechanisms have existed for a number of years, [*734] ESOPs and TRASOPs have been of primary interest to employers because of their tax and capital formation advantages. n4 More recently, [*735] however, unions have sought or have been offered company stock either in exchange for bargaining concessions or to save jobs in plants scheduled for closing.

Preventing plant closings was not Congress' specific objective in creating ESOPs and TRASOPs. n5 Rather, ESOPs and TRASOPs were created as a method of strengthening the free enterprise system. They provide the means both to stimulate necessary capital formation and to expand stock ownership possibilities for a broader base of the population -- employees. n6 Because these ownership mechanisms were created primarily as financial vehicles, their structures are extremely flexible and the degree of democracy in their structures varies widely. A range of stock transfer options is thus open to present and future labor negotiation.

For the employer, there are considerable tax and financial advantages to giving or selling stock to employees through an ESOP or TRASOP. n7 For employees and employers, stock transfers may be an attractive employee benefit when the employer is otherwise unable to provide any wage or deferred benefit increases. Otherwise, most unionists prefer clearly defined wages and benefits to payments of stock, which by its nature has a fluctuating value. Employees may [*736] also be interested in stock transfers, however, as a means for obtaining greater control over their working conditions and future job security. Additionally, an ESOP or TRASOP is another form of deferred retirement income for employees. n8

This article discusses a number of union experiences with worker ownership and the lessons derived from them. Union members have obtained more control over employee-owned companies as labor's understanding of these flexible mechanisms has increased. In most of the cases discussed here, jobs and the enterprise have, to date, been saved. n9 It is important to emphasize, however, that the potential benefits of employee ownership for workers and unions are not confined to concessions or plant closing situations. n10 Nor is such a plan always a wise choice. There will be some employee-owned companies that fail. n11 Of the wide variety of reasons for plant closure, n12 only some present reasonable prospects for viable employee buyouts. n13

This article explores a range of legal issues posed by the uses of employee ownership by unionized employees. Several preliminary issues confront a union that is considering negotiation of an ESOP for its members. Those emanating from the National Labor Relations Act of 1935, as amended, include: the "employee" status of employee-stockholders; the employer's duty to bargain with the union; the possibility of employer domination of the union; and the possibility of union interference with employer selection of a bargaining representative.

The union's role as negotiator of voting rights for its union members who are employee-stockholders is also discussed. Stock voting arrangements are a critical factor in determining the value of [*737] a plan. n14 Employees may be offered straight stock purchase plans: TRASOPs, which must pass through voting rights; or ESOPs, in which voting rights may be passed through. n15 Most ESOP and TRASOP plans do not give employees an ownership majority. However, where employees have voting stock held in a trust, which they can control democratically by majority rule bloc voting, over time they can have a significant or controlling interest in the company without holding a majority of stock. n16 Once the stock transfer is completed, voting trusts or voting blocs of employee-stockholders can become a powerful tool in developing worker control, facilitating changes in both managers and management policies. Employee-stockholders have the right to raise any issue of concern at a stockholders meeting, provided proper notice is given. n17

Unions in the United States generally have avoided involvement in corporate decisionmaking. n18 Many unionists are skeptical about union involvement in employee ownership programs because of a number of potential conflicts of interest arising under the Landrum-Griffin Act and the antitrust laws. Labor organizations also fear becoming involved in business decisionmaking because of their [*738] duty of fair representation. n19 Some unionists view minority representation on corporate boards as a waste of time n20 or see it as a ploy to mislead workers into thinking they are capitalists. n21 There are a few instances, however, in which union officers sit on the boards of directors of corporations with which they negotiate. n22 This article discusses the mechanisms that are available to resolve some of the potential conflict of interest and duty of fair representation problems posed by union representation of employee-stockholders, and the antitrust issues raised by the appointment of union representatives to the corporate boards of directors. Whether the securities laws require registration and disclosure of information to employees who will receive stock in the stock-ownership plan is also discussed. In addition, special pension problems must also be considered [*739] when a union is asked to provide investment capital by changing or ending a diversified pension plan.

The reader should note the distinctions between ESOPs, TRASOPs, stock-bonus or stock-purchase plans, n23 producer co-operatives, n24 Taft-Hartley trusts n25 and co-operative ESOPs, n26 all of which are discussed in this article. Stock-ownership plans range from a small percentage of employee ownership to full buyouts. However, since possible uses of ownership rights and liabilities develop on a continuum, the lessons from a buyout may be relevant even to a small percentage TRASOP.

II. UNION EXPERIENCES WITH STOCK PLANS, CO-OPERATIVES AND BOARD MEMBERSHIP

A. Direct Stock Purchase -- Chicago and North Western Railway (CNWRW)

Prior to the 1972 sale of the railroad to its employees, the old Chicago and North Western Railway Company was a wholly owned [*740] subsidiary of Northwest Industries, Inc. n27 Beginning in 1956, Ben Heineman became the controlling stockholder of CNWRW. He worked to increase the value of the corporation by merging it with other railroads. The last railroad mergers for CNWRW came in the late 1960's. Thereafter, the corporation had a business downturn and began to defer maintenance of the railroad. The average speed on their track went from sixty or seventy miles per hour down to ten. The corporation also sold off railroad real estate n28 and began to acquire other companies, including Fruit of the Loom, Cutty Sark and Terra Chemicals. n29

In 1972, CNWRW completed the sale of the railroad to its employees in the following manner. n30 A new corporation was created, North Western Employees Transportation Company, now called Chicago and North Western Transportation Company (CNWTC). The new company assumed the transportation obligations and acquired the transportation assets of the old company without any payment of cash. This bargain arrangement was made in part because the parent corporation wanted to be rid of its less profitable railroad operation and the regulatory structure associated with it. n31

The new corporation, CNWTC, obtained operating cash by making a stock offering of 300,000 shares to all employees of the old company. No financing was needed for the actual purchase of the assets and liabilities, although stock purchases totaling at least $ 1,000,000 were required as a condition of the asset purchase. Class A common stock was offered at fifty dollars per share for only nineteen days. There were no payroll financing arrangements. The minimum stock purchase allowed was ten shares. The maximum stock purchase allowed was graduated on the basis of income. An employee earning less than $ 10,000 was limited to 100 shares, while an employee earning $ 30,000 or more could purchase as much as 2000 shares. n32

[*741] Only a small number of employees purchased stock in this first offering. Most of them were management or higher paid employees. From this offering, employees purchased a total of approximately $ 3,600,000 of stock. Within the first two years of operation under the new corporation, the stock value increased greatly and then split sixty to one. Therefore, there was another stock offering in which employees were not limited as to the number of shares they could buy, and employee-stockholders could tender their own stock for sale at the fixed price. A payroll deduction for employee stock purchase finally was established. n33 At that time, approximately ninety-seven percent of the company's stock was employee owned. In 1980 or 1981, CNWTC stock became listed on the New York Stock Exchange. Since the sale of the stock was not limited to employees, the percentage of employee ownership declined as the value of the stock increased and a public market became available. n34

Approximately ninety percent of CNWTC and CNWRW employees are, and were, unionized. n35 Yet, the unions were not involved in any of the buyout negotiations. n36 Although some union members bought stock and made large profits -- the original fifty dollar shares split sixty to one and then rose from a value of eleven dollars each to ninety dollars each -- most union members were skeptical about whether the old management, which had allowed the railroad to deteriorate, would do any better in the new company. n37 Furthermore, unionized employees may not have been intended to be the major beneficiaries of this "employee ownership" plan since there was no payroll deduction plan for the first significant stock offering, lower paid employees were limited in the amount of stock they could buy, and the offering was only good for nineteen days. Rather, this plan was apparently aimed at selling the company to its management.

The employee-ownership plan was not negotiated with the unions, and the unions have made no attempts to organize their shareholder-members' votes into a bloc. n38 Many of the hourly employees who owned stock sold that stock to management or outsiders because it became so valuable. n39 No ESOP was involved here. Yet, the Class A common stock was essentially held in trust. n40 There are only [*742] three shares of Class T common stock; two owned by employees, the third owned by an outside trustee. n41 All the other employees own Class A common stock. Until May 1982, only the holders of the Class T stock had the power to vote for directors and to vote on most matters submitted to stockholders. n42 Therefore, until May 1982, the unions could have had no voting power, even if they had organized their shareholder-members as a bloc. Hourly employees, thus, had no more voice in management than they did before the buyout. n43

CNWTC is an example of a profitable employee-owned company, purchased from the former owners when it was unprofitable. However, it is not an example of an employee-owned company designed to be owned or controlled by all employees. Nor did the union influence the buyout in any way.

B. Unionized Worker Buyouts of Whole Companies or Divisions

In the following three cases, Vermont Asbestos Group (VAG), South Bend Lathe (SBL), and Rath Packing Company (Rath), employee ownership saved the workers' jobs. At VAG and SBL, where local union leaders and many employees were displeased with a number of factors in the plans, the local union leaders expressed much faith in the concept of worker ownership. Both current local presidents, Monte Mason, n44 United Cement Lime, Gypsum and Allied Workers International Union Local 338 (VAG) and John Deal, n45 United Steelworkers of America, AFL-CIO, CLC, Local 1722 (SBL), and former VAG local president, Lawrence Despault, n46 stated that they believed worker ownership could work if the local union people were better informed when developing or negotiating with the developers of the buyout plans. Apparently, Local 46 United Food and Commercial Workers International Union at Rath Packing in Waterloo, Iowa, learned a great deal from the experiences [*743] of others.

1. VERMONT ASBESTOS GROUP

Prior to the March 1975 purchase by its employees, GAF Corporation owned the asbestos mine located near Eden Mills, Vermont in the foothills of the Lowell Mountains. n47 The asbestos mine was only a small division of GAF, acquired as part of a merger ten years earlier. n48 In GAF's view, the mine became economically unfeasible in 1975 when the Environmental Protection Agency (EPA) ordered the company to install approximately $ 1,000,000 of pollution control equipment. n49 It was also apparent to both the company and the union that further dust control devices might become necessary because of developingl occupational safety and health standards. n50

The mine, however, was the major economic resource for the local community. With over 175 employees, it was the major employer in the area. n51 After several unsuccessful attempts to save the mine by political means, the workers and community members decided to try to buy the mine. n52 GAF agreed to sell them the mine, which produced $ 7,000,000 in sales in 1977, at a salvage price of $ 450,000. n53 However, the miners encountered difficulties in putting together a financing package.

In order to raise the needed capital, the miners began to sell stock in their new company, Vermont Asbestos Group (VAG). They agreed to keep at least fifty-one percent of the stock in the hands of fellow workers. n54 One hundred percent of the employees bought stock. n55 Shares were sold at fifty dollars per share, and no one was allowed to buy more than $ 5000 of stock. Stock not sold to mine employees was sold to people in the local community, raising $ 78,000. After this success, the Vermont Agency for Development and Community Affairs agreed to guarantee eighty percent of any bank loan to VAG. Thereafter, a consortium of seven banks finally agreed to lend the workers $ 1,500,000 toward the purchase of the [*744] mine and pollution control equipment. n56

VAG honored the union contract that had been negotiated with GAF, and the collective bargaining relationship continued. Several hourly workers became members of the new VAG board of directors, although they did not constitute a majority. n57 VAG employees did not lose any pension rights or credits due to the change in employers. n58 Some senior employees received pensions from both GAF and VAG. n59 GAF pension credits were transferred to VAG employees. n60

According to current Local 338 President Monte Mason, the first year of business for VAG was much better than expected due to the closing of asbestos mines in Canada and increases in the price of asbestos. In the first year, the company paid off the entire mortgage and a $ 3,000,000 loan for pollution control equipment. n61 In the 1976-78 union contract, there were substantial increases in wages and insurance and retirement benefits. n62 Union members were much more concerned with the company, they worked harder, their safety record improved dramatically n63 and they became more involved with the union. n64

Today, the majority of VAG stock is not owned by VAG employees. In August 1981 the mine was still in operation and employed most of its complement of 1975 employees. n65 Yet, the union members' involvement in the company has decreased. n66 The employees [*745] lost control of the company because many of them sold their stock. A local businessman named Howard Manosh bought a significant number of their shares. Manosh now controls VAG through the shares he owns and the support of a few other significant shareholders. n67

Employees sold their stock for two reasons. The company was profitable. During most of 1978, the shares, originally purchased for fifty dollars, were worth $ 1800 to $ 2000. The price peaked at $ 2200 per share. n68 For workers with an annual income of $ 9000 to $ 10,000, the prospect of making such a profit was quite tempting. Yet, both current Local 338 President Monte Mason and former Local 338 President Lawrence Despault said that most of the employees probably would have kept their stock had they not felt betrayed as stockholders by their board of directors, who ignored the stockholder's vote against a major investment in August 1977. n69 To date, the company has lost approximately $ 5,000,000 on this project, n70 a 100% internally financed plant for processing asbestos waste into wallboard.

Many of the stockholders were outraged at the board's action. They believed that, as stockholders, they had no means to protect their investment if they could not control the board. n71 The August 1977 stockholders meeting illustrated a growing problem. n72 The workers felt they were not adequately represented in the decisionmaking [*746] of the company they owned. n73 Hourly workers were on the board of directors, but according to former Local 338 President Lawrence Despault, some of these worker directors became "brainwashed" after becoming directors. n74

The union took an active role in picking some of its most active and capable members to run for the board of directors in the first two elections. n75 Yet, Despault believed that once on the board, other board members prevailed upon them not to discuss certain matters with the union. The hourly-employee board members complied. Thus, the board knew what took place in the union meetings -- for example, the union's bottom line in bargaining -- but the union did not have similar information about the company's position, despite having members on the board. n76 One union negotiating team member who was elected to the board of directors was convinced by others on the board that he should give up either his negotiating team position or his board position. He resigned from the board. n77

In reflecting on their experiences at VAG, both the present and former local union presidents feel that both the initial spirit of the buyout and the hourly workers' influence over the company could have been retained had the union known how to retain such control. The union has had no program or training for its members who become board members. It had no clear answers to the conflict of interest arguments that management directors made to the worker directors. n78

At the time of the buyout, there was some discussion of creating an ESOP. However, then Local President Despault had been warned by a representative from another union that, "you may not get out of it what you put in." As a result, the VAG employees voted [*747] against the ESOP. n79 Ironically, it appears that if the hourly workers had pooled their stock in an ESOP, voting it as a bloc instead of relying on a few untrained individual members, they may have had more control over the company. n80 This would not necessarily be true of all ESOPs, but it would probably be true of ESOPs designed on the Rath Packing model. n81

As in the case of the Chicago and North Western Railway, the VAG worker buyout saved the workers' jobs, but was not an ideal example of worker control. At VAG, hourly workers were more involved in making the buyout happen. There were, and still are, hourly worker union members on the board of directors whom the stockholders elect. However, individual stock ownership, as shown by CNWTC and VAG, is not conducive to joint action. Each individual is concerned primarily with his own investment and has no institutional method of acting as a bloc with fellow workers. Unions should be aware of the various trust and co-operative arrangements which present solutions to this problem. n82

2. SOUTH BEND LATHE

a. Background

South Bend Lathe (SBL) is a manufacturer of metal cutting lathes and other machine tools which has been 100% employee-owned through an ESOP since it was purchased from its former conglomerate parent, Amsted Industries, Inc., on July 3, 1975. n83 In 1975, SBL had approximately 500 employees; n84 approximately 300 were hourly employees represented by the Union Steelworkers of America (USWA), AFL-CIO, CLC, Local 1722. There were 240 [*748] hoursly employees in 1981. n85

In January 1975, it became public knowledge, n86 through Amsted advertisements, that Amsted intended to sell its South Bend Lathe Division because it had been losing money steadily since 1970. n87 Some of the potential buyers were liquidators. n88 Under threat of plant closing and liquidation, J.R. "Dick" Boulis n89 sought financing to buy out the plant, and elicited support from the employees and the local union in efforts to create an ESOP and find financing to buy out the plant. SBL received a $ 5,000,000 loan through the United States Economic Development Administration (EDA). The loan was from EDA to the City of South Bend, which made a loan to SBL at three percent per annum for twenty-five years. n90 Additional private financing also was arranged. Some employees were told by Boulis that as a condition of a federal grant, an ESOP would be established. n91 The details of the ESOP plan were developed by Boulis and his attorneys. The plan was not negotiated with the union, but rather was presented as a take-it-or-leave-it proposal. n92 SBL employees were sell acquainted with the horrendous effects of plant closings, since many of them were former employees of Studebaker n93 or had lived in South Bend at the time Studebaker closed all of its South Bend facilities in 1964. n94

[*749] b. Pension problems

Employees were also told that the ESOP would replace their pension plan. n95 From the beginning of the ESOP proposals, the local leadership and the employees were told:

In order to stay alive (meaning to keep the plant open), we had to have an ESOP, but the ESOP had no provisions for a Pension Plan. . . . [We] had no choice to make . . . whether we could keep our pension or not . . . because we would have no Plan. . . . We had no choice to say whether we wanted to go with or without a pension. n96

Because ESOPs were relatively new, especially in unionized situations, n97 the local union was unable to find any information about ESOPs to counter the assertion that the pension plan had to end. n98 In fact, in many ESOPs, such as the Rath Packing ESOP, the pension plan was continued.

The SBL sale occurred shortly after parts of the Employee Retirement Income Security Act of 1974 (ERISA) n99 had become effective. n100 Because of the complexity of the new Act, the local union could not obtain a precise answer regarding Amsted's pension obligations upon the sale of the company to the ESOP company, SBL, and only later learned that ERISA did not cover Amsted's plan at SBL at the time of the sale. n101 Without even informing the union, Amsted unilaterally amended the pension plan so that benefits were payable only to those who were retired or eligible for immediate retirement as of July 3, 1975. n102 A number of SBL employees who were [*750] only a year or two away from retirement thus were ineligible for any collectively bargained pension plan benefits. n103

The sale to SBL occurred between July 1-3, 1975, but the collective bargaining agreement in force at the time, which contained a successorship clause, did not expire until October 1977. n104 Since SBL continued Amsted's business, the union's position was that the employer violated the pension section of the collective bargaining agreement by offering SBL employees a new contract that unilaterally excluded the pension plan, added the ESOP, and changed vacation and some pay rates. n105 In January 1976, the union grieved SBL's refusal to pay any pension benefits to employees who became eligible for them after July 3, 1975. Boulis refused to accept any appeal of the grievance to the international representative level and also refused to agree to mandatory arbitration. n106 Therefore, the union is now seeking a court order to require SBL to arbitrate the pension grievance. n107

Amsted amended the pension plan to remove nonvested SBL employees from pension plan coverage instead of terminating the plan. The pension plan beneficiaries did not have the ERISA protections afforded to those whose plans have been terminated pursuant to ERISA n108 and section 411(d)(3) of the Internal Revenue Code. n109 SBL illustrates the importance of a thorough exploration of the ERISA consequences for the employee-beneficiaries before they make the decision to convert n110 or terminate a pension plan. In most cases, the wiser choice is to accept deferrals of other benefits and leave the pension plan intact. n111

[*751] c. Voting rights

The voting rights of the employee-stockholders at SBL are quite limited. When SBL was created, the board of directors unilaterally adopted the ESOP and installed a committee to manage the Employee Stock Ownership Trust (ESOT) which holds all the company's stock. n112 The employees do not receive title to their shares except upon retirement, death or after a break in service of more than one year, provided the employee has any vested shares. n113 Under sections six and seven of the SBL ESOP Plan, stock is allocated to each employee each year of his employment. n114 However, the employee's right to vote this stock or to obtain it upon termination of employment does not occur until it has vested. Until an employee has completed three years of company service, he has no vested accumulation. After three years of service, the employee is thirty percent vested and can vote thirty percent of the shares allocated to his account. After four years, he is forty percent vested and can vote forty percent of the shares allocated to his account. Finally, after ten years of service, the employee can vote one hundred percent of the shares allocated to his account.

The committee sends out proxy statements soliciting votes from ESOP participants based on the number of vested shares held by each. The trustee is then required to vote those vested shares as instructed by the participants and to vote the rest of the ESOP shares, including shares already allocated to but not yet vested in employees, as the ESOT committee thinks best. n115 According to a proxy statement sent to employee-stockholders on September 24, 1980, only 3,755.69 of the 16,884 shares of common stock in the ESOP were vested and eligible for participant voting. n116 Thus, the [*752] ESOP committee, which is itself appointed by the board of directors, elects the board of directors. n117

d. Attempted union busting

The wedge that Boulis may have attempted to create between the local and international unions concerning the pension question n118 appeared to be part of a larger strategy. Form July 1975 when SBL bought the plant until 1977 when the USWA sought and won a new NLRB election, Boulis refused to deal with the international union, which had been the bargaining representative of the workers in that plant for the prior thirty years. n119 Boulis dealt only with the [*753] local union and tried to convince the employees that since they had an ESOP, they did not need the union. n120

For some unions, the term "ESOP" has become synonymous with union busting due to experiences like that at SBL, where an entrepreneur creates employee ownership without employee control under imminent threat of a plant closing, or experiences where ESOP promoters claim that employee ownership and profit sharing are good ways to keep unions out. However, the degree of worker control is not determined by the mechanism itself, which is quite flexible, but rather by the way it is employed.

The SBL ESOP Plan is drafted in incomprehensible language, and reads like the most baffling of insurance policies or tax laws. n121 The plan participants, therefore, neither understood the meaninglessness of their voting rights when the plan was proposed, nor knew that the law permitted greater voting rights. n122 According to Local 1722 President John Deak, if the union had known to push for more direct voting rights under the plan at the time it was presented, they would have had the leverage to change the plan. n123 At the time, however, the union did not know enough about ESOPs to exert their power to secure better voting rights or a more favorable pension arrangement. n124

3. RATH PACKING COMPANY

a. Background

Rath Packing Company, a nationally known meatpacker specializing in pork products, is the second largest employer in Waterloo, Iowa and the surrounding Black Hawk County. Rath employs 2200 local people with an annual payroll of $ 35,000,000, and provides a significant local livestock market. During the 1970's, it lost over $ 20,000,000. n125

To remain competitive, Rath needed $ 4,500,000 in capital investments [*754] for modernization. Community officials proposed that the United States Department of Housing and Urban Development (HUD) grant the city money under its Urban Development Action Grant (UDAG) program to be lent, in turn, to Rath. n126 HUD conditioned the loan on new equity investment.

In March 1979, UFCW Local 46 officials presented their own plan for the employees to purchase the company, which was accepted by the company, HUD and the EDA. n127 The union's objectives in presenting its own plan were to save jobs, limit concessions, gain control of the company and management decisionmaking, protect the pension plan, and prevent a proposed buyout that would have included drastic wage and benefit cuts without giving the union or employees any control over the company. n128

The local leadership acted on its knowledge that for the last ten years, 1,800,000 shares of common stock, equaling a sixty percent interest in the company, were available in authorized but unissued treasury stock. n129 The employees raised matching funds for the HUD loan by taking temporary pay and benefit deferrals. n130 They contributed their foregone wages, by weekly payroll deductions, to purchase the authorized but unissued treasury stock through an ESOP. n131 Each employee in the plan was credited with ten shares in lieu of twenty dollars pay each week, until the shares were all purchased. The deferred vacation, sick pay and pension increases [*755] were kept in a company escrow account. The union retained veto power over expenditures from the account to ensure that it was used for the needed modernization. n132 The escrow fund was discontinued when the stock purchase agreement closed. It was replaced by a profit-sharing plan which ultimately will return these deferrals n133 to employees through profit sharing on future pre-tax profits allocated on the basis of accumulated deferred benefits.

Local 46 was well situated to initiate and carry out this buyout plan because it represents almost all the employees of the Rath Company. n134 The local leaders also timed the announcement of their plan to follow, rather than to precede, national negotiations to prevent use of their "deferrals" by employers in national negotiations. They consciously sought to make their "deferrals" so costly to the employer in terms of worker control that their union brethren would have strong arguments against giving any similar "deferrals" without gaining majority control over the company. n135

b. Rath response to the control dilution problem

The local leadership at Rath wanted to avoid the pitfalls of an individual stock ownership plan like VAG, which had caused the employees to lose control of the company. They considered creation of a co-operative but found that, at that time, they would have had to gain control of 100% of the Rath stock to change the corporation into a co-operative. n136 They also tried to create a non-ESOP perpetual stock trust but the Department of Labor denied the necessary [*756] ERISA exemptions. n137 As a result, the union leadership developed the ESOP under which they now operate.

One of the features of the plan is that distribution of benefits "normally will not be made earlier than five years after the date the employee commenced participation in the ESOP, regardless of when termination of his employment occurs. . . ." n138 The purpose of this language was to create a five-year grace period during which the drafters hoped the ESOP rules would be changed to allow a majority employee-owned ESOP to pay its termination distributions in cash rather than in stock. A cash distribution would prevent dilution of control of the company out of the hands of active employees. n139 [*757] The Economic Recovery Tax Act of 1981 made just that change. n140

c. Mechanics of the Rath plan and trust

All bargaining unit employees participate in the ESOP, and nonbargaining unit employees may participate. Each participant purchases ten shares of Rath stock per week, in lieu of twenty dollars in pay, which are placed in the ESOT. The market value of the stock as of July 15, 1981 was $ 4.50 per share. n141 The stock is actually held in the ESOT and attributed to separate accounts for each employee. The participant does not hold title to the shares until they are distributed upon her termination of employment, at which time the participant may opt to take her distribution in stock or cash. n142

The ESOT board of trustees is empowered to vote all stock and other voting securities held in the ESOT. The board of trustees is elected democratically by all participants on a one vote per person, not a one vote per share, basis. Before each stockholders meeting, the members of the ESOP meet to vote on all issues that will be [*758] voted on by the shareholders. The trustees are bound to vote all the ESOT shares as instructed by the majority of those voting at the membership meeting. n143 All plan trustees must be plan participants, but they may not be "officer[s], employee[s], agent[s] or representative[s] of the union [UFCW Local 46], or of any other labor organization." n144

d. Rath relationship between the ESOP and the union

Although the ESOT trustees may not be officers or agents of the union, Local 46 explicitly has retained veto power over any possible changes in power, any plan modification or termination of its agreements that created the plan with Rath. n145 Furthermore, since the Rath Packing Company has direct voting by shares for all director seats, the majority voting bloc can elect the entire board of directors. n146 The board of directors was expanded from six to sixteen members during the transition period to majority employee ownership at Rath Packing. The additional ten directors are called "provisional" directors and became permanent only when the 1,800,000 shares of stock were sold to the ESOP. Until then, the nominees for the board of directors had to be mutually acceptable to the company and Local 46. n147

Along with the employee-ownership plan, the company and the local union at Rath have put a lot of effort into developing a working system of management that involves all employees. n148 However, the UFCW International Union does not officially encourage employee [*759] ownership. n149 John Mancuso, Assistant to the Director of the Packinghouse Division, reasoned that "we find it hard to be bosses and workers at the same time." n150

Despite Local 46's efforts to maintain the structure of the national pattern agreement between the UFCW International Union and the big four meatpackers, n151 Mancuso points out that its pension plan n152 is only funded at eleven and one-half dollars per month per year of service, while the industry pattern is fifteen dollars per month per year of service. In addition, the Rath employees are only paid half-time for their ten holidays instead of the full pay involved in the pattern. At Rath, employees also are paid only half of the straight time rate for vacations, although they are allowed the same number of weeks off as the national pattern provides. The master agreement provides for full pay for vacation days. n153

In the United States, there are very few examples of worker ownership and worker control in the same company. n154 Rath Packing is one of the first such experiments in an industrial plant. n155 Because of the control extracted at Rath in exchange for the "deferrals," other companies do not use Rath as an example in seeking concessions. n156 Community leaders in other communities have used Rath as an example in encouraging workers to buy failing plants spun off by larger companies. However, such a purchase is much less advantageous than the purchase of an entire company as at Rath.

e. Later economic difficulties

Rath illustrates an innovative ESOP trust structure, and financing mechanisms developed with the clear intention of preserving trade union principles as well as jobs. Rath faces grave financial [*760] problems due to an unfavorable hog market, very old facilities and excess capacity in the industry. n157 The structural innovations should not be discarded or blamed if Rath ultimately fails due to economic circumstances. The Rath experiment has already succeeded in preserving several thousand jobs since 1980.

Because of bad economic circumstances, all three Rath Packing Company pension plans were terminated in September 1982. By a sixty percent vote, the union approved the company's request to the Pension Benefit Guarantee Corporation (PBGC) to terminate the union pension plan, along with two other plans, in order to save the company and jobs. Upon termination of any pension plan, PBGC has the authority to place a lien on the company in an amount equal to the lesser of the plan asset deficit or thirty percent of the employer's net worth, n158 and thus can force a company to close. However, Rath, which has a negative net worth, has entered into a ten-year agreement with the PBGC under which Rath is required to pay its pension liabilities to PBGC, and cannot create any new pension plans for at least ten years. UFCW Local 46 President Lyle Taylor said the termination was essential to keep the company alive. n159

The PBGC will pay benefits to retirees and employees with vested benefits. Retirees and employees with at least ten years of service will receive almost all their pension benefits. The benefit level of current employees with over ten years of service will be frozen at thirteen dollars per month per year of past service, and they will accrue no further pension credits. Approximately 390 bargaining unit employees and a total of approximately 600 employees from all three plans who have less than ten years of service will lose all their pension rights.

C. Unionized Worker Buyouts of a Single Plant vs. Full Company Buyouts

1. HYATT-CLARK INDUSTRIES

In the fall of 1981, General Motors (GM) sold its New Departure Hyatt Roller Bearing Plant in Clark, New Jersey to a group of its former employees, consisting primarily of UAW members and former management employees. n160 GM's primary reasons for closing [*761] the plant were: 1) its new front-wheel drive cars did not need the taper bearings produced at that plant; 2) the bearings it needed could be supplied more cheaply by outside sources; n161 and 3) labor costs were too high due to both the UAW national agreement with GM and the local agreement with Local 736. n162

In order to save jobs in the plant, the employees organized a committee to fund a feasibility study concerning purchase of the plant. Upon receipt of a favorable study, the committee organized purchase of the plant by means of an ESOP. n163 The employees took a twenty-five percent cut in pay and benefits to make their costs feasible, although they retained health and retirement benefits at the former UAW levels. n164 Employees hope to be repaid these "deferrals" under a profit-sharing plan. GM agreed to a contract to purchase bearings from the plant for three years. n165

The union also obtained a one vote per person distribution of voting rights within the ESOP. n166 The employees have a greater voice in management of the plant, n167 and in nine years shall elect half of the company's board of directors. n168 The workforce has been reduced to about one-half its former size. n169 None of the former employees who desired a job at Hyatt-Clark has been refused one. Many of the former GM employees sought special early retirement under plant closing language negotiated in the former GM contract and maintained by the union as an essential part of the sale agreement. n170 However, the new company must pay GM $ 15,000,000 over twenty years to retain $ 60,000,000 in plant closing pension benefits. n171

The local leadership has stated frequently that the international [*762] union was of no help in the employees' efforts to purchase the plant, and has alluded to a history of animosity between the local and international union which long predated the buyout. n172 The international union faced several problems in aiding this local. First, the local sought $ 5,000,000 from the international union as part of the Hyatt-Clark ESOP loan package. n173 The international was told that the New Jersey Economic Development Authority would guarantee only fifty percent of the $ 5,000,000, although the UAW originally was told a ninety percent guarantee was available. n174 The local did not know of this disparity. n175

A greater problem for the international union was the fact that it did not have an established policy for dealing with such a situation. If it loaned $ 5,000,000 to this local ESOP committee, on what criteria could it then deny or grant such a loan to another local? n176 Furthermore, the local agreed to give the new company wage and benefit cuts before the international union had agreed to reopen the national agreements. Although the local agreement did not directly violate the national agreement, the new company's employees were working at wage and benefit rates that undercut the international union's national agreements with GM. n177

Members of UAW Local 736 who were employees when the [*763] plant was owned by GM and who opposed the buyout filed a duty of fair representation case against the local and international unions and GM, contesting the union's involvement in developing the ESOP and granting employment preference in the new company to those who contributed to the feasibility study. n178 The NLRB has dismissed the charge. The lawsuit filed against the local was dismissed with prejudice and without costs, by mutual agreement of the parties. n179

2. FORD-SHEFFIELD

In July 1981, a joint union-management task force was created at Ford Motor Company's aluminum die-cast plant in Sheffield, Alabama in an attempt to reduce operating losses. Through the efforts of this committee and 100 suggestions provided by workers, the company saved $ 1,500,000 at their plant in August and September 1981. n180 Yet, on October 21, 1981, Ford announced that it would close the plant unless the employees agreed to accept a fifty percent cut in pay and benefits by November 15, 1981. If they had accepted the cuts, they would have had until January 1, 1982 to decide whether to adopt a profit-sharing plan or to buy the plant themselves. n181

UAW Local 255 President L.C. "Sonny" McCanless sought guidance from UAW International President Douglas Fraser regarding whether the local could enter into negotiations with Ford over the proposed cuts. President Fraser said, "Constitutionally (under the UAW International Constitution) this is not possible. The entire UAW-Ford membership ratified the National Agreement." n182 Fraser also stated that the UAW Ford Council had adopted a resolution on March 19, 1981 opposing reopening the national agreement. n183 [*764] Therefore, the local refused to discuss Ford's initial offer.

After the local rejected the cuts, which had been a prerequisite to any discussion of the ESOP, Ford again offered to sell the plant to the employees. Ford stated that the previously required cuts "were not a prerequisite for buying the plant," n184 although Ford still believed such cuts were essential to running the plant successfully. n185 According to Ford spokesman Davis, when Ford offered to discuss the ESOP without a wage cut prerequisite the local union demanded, as a precondition to negotiation of the ESOP, that Ford guarantee to give its employees "special early retirement" benefits it had provided in other plant closing situations. n186 Local 255 President McCanless said the union did not consider special early retirement a precondition to further negotiation. Rather, the union was concerned with protecting the contractual rights of its members, such as special early retirement, should the workers collectively decide to buy the plant. Based on International UAW President Fraser's decision, the local union determined that they could not negotiate the ESOP without breaching the national UAW-Ford contract. Only the workers as buyers, not as union members, could pursue the ESOP. n187 Ford refused to guarantee these benefits as a precondition to further negotiations, and the ESOP talks ended. n188

According to its president, Sonny McCanless, the majority of UAW Local 255 members were skeptical of Ford's ESOP proposal for several reasons. The initial proposal of a fifty percent wage and benefit cut was so drastic it caused the employees to see Ford's ESOP proposal as insincere and an attempt to break the national [*765] agreement. n189 Further, less than one month was provided for the cut decision, which gave the local inadequate time to evaluate the feasibility of such a purchase. n190 Moreover, management told the union that it had set the plant's price for the specialized transmission casting for ATX transmission cases at fifty-one dollars, although it cost ninety-seven dollars to produce. n191 Such internal pricing procedures could account for much of the alleged $ 3,000,000 monthly loss. n192

Ford said it had decided to lower its labor costs drastically or close the plant because it was losing $ 3,000,000 per month. n193 Ford had tried to sell the plant to other parties, but the labor costs deterred buyers. n194 According to Ford spokesperson Michael Davis, [*766] the Ford Casting Division management believed the plant could have been profitable if the employees had bought it, had lowered their costs, and had increased the plant's use by contracting with other automobile and agricultural implementmakers for die-cast. n195 Ford viewed the Sheffield workforce as one of its best, most loyal and well-educated workforces. n196 In February 1982, the plant was operating at thirty-five percent capacity. n197

One possible view of Ford's strategy is that it is trying to organize itself like a Japanese company, giving lifetime job security to its employees in its central production operations, but buying its parts from independent supplier companies who compete with each other and are not covered by the UAW-Ford contract. If Ford had planned to use the Sheffield plant for only a few more years until it found a more convenient place to produce the parts made there, it certainly would have saved money by selling to an ESOP if it could have sold the plant, along with its pension and plant closing benefit obligations. Ford also could have obtained the tax advantages accorded ESOP contributions if it had helped finance the ESOP purchase. Yet, Ford denied any tax motives and asserted it would not have encouraged the purchase if it had believed the plant would not succeed because Ford would not want to be involved with a bankrupt supplier. n198

In the Ford-UAW national agreement reached on February 13, 1982, the union agreed to benefit concessions and limited wage increases in return for Ford's agreement not to close any more plants due to outsourcing. This agreement applies only to plants where a closing announcement had not already been made; therefore, it excluded Sheffield from protection. n199 The union also won a Guaranteed Income Stream (GIS) plan, which provides high-seniority employees [*767] with payments until retirement if they are laid off due to plant closings, as well as increased Supplemental Unemployment Benefits (SUB) payments for lower-seniority Ford workers who are laid off. n200 UAW Local 255 approved the new Ford national agreement and voted overwhelmingly to allow the local to reopen negotiations on its local agreement with Ford management, thus opening the door to possible local concessions. Ford reviewed the planned closing, n201 and decided to close the plant. n202 Although the new benefits did not protect the Sheffield workers from the planned closing, they made it more attractive for the employees to let the plant close instead of taking the ESOP offer. n203 To many it seemed foolish to risk losing early retirement benefits, GIS, SUB and other plant closing benefit guarantees to take on a risky ESOP, especially where the long-established UAW principle of national agreements was being challenged.

When asked what lessons other unionists should learn from the Ford-Sheffield experience, Sonny McCanless replied, "the value of an international union and its national agreements as the source of ultimate protection for workers." n204 James Zarello, shop chairman of UAW Local 736 at Hyatt-Clark, distinguished the situation in Sheffield from that in New Jersey, where GM did not require a cut in wages and benefits as a prerequisite to selling its plant to the workers. n205 Another clear difference is that GM gave its employees time to obtain a feasibility study before they were required to make a final decision to buy. GM also agreed to purchase bearings from the Hyatt plant for three years and lent the new company $ 20,000,000. n206

The Hyatt-Clark and Ford-Sheffield single plant buyouts must [*768] be viewed differently by unions than cases of whole company buyouts such as Rath, VAG or CNWTC. A single plant buyout separates that plant from a master contract, creating wage competition between those who were formerly unified in their wage and benefit demands to the company. Yet, the question for the workers involved is, how else can we save our jobs? Is a worker ultimately better protected by keeping the union's national contract strong or by gaining some control over his own plant?

A similar question arose concerning Rath Packing. The UFCW has a pattern master agreement with all the unionized meatpackers. n207 Even though Rath Packing is a separate company, and thus does not present the immediate problem of wage and benefit competition between union brethren under contract with the same employer, the International UFCW found that community leaders use Rath as an example to encourage the union members to buy single, failing plants of multiplant employers. n208 Where there is a national agreement, however, single plant buyouts always present the issues exemplified by the Hyatt-Clark and Ford-Sheffield cases.

Rath Packing is distinguishable because it represents a different type of buyout. There, the unionized employees obtained majority control of the entire corporation: its brand name, its sales force, its supply and distribution network. The Rath ESOP company is not a captive supplier to its parent; it is the parent. Even at Rath, however, the "deferrals" taken from the national agreement affect the strength of the master agreements. Yet the Rath example shows that use of timing and a conscious effort to protect the national agreement can blunt the ability of employers to take advantage of such "deferrals." n209

The fragmenting aspect of small ESOP companies in unionized corporate industries presents a basic problem for unions. Yet, without ownership rights or other union controls over management pre-rogatives, unions have no effective means of preventing outsourcing, capital flight and job loss. One possible solution is to seek ownership rights across the board in national agreements as a means of obtaining some control over management decisions on divesting, out-sourcing [*769] and foreign and domestic investment. Some of the potential drawbacks to such a plan are dealt with elsewhere in this article. n210

D. Industrial Co-operatives

Industrial or producer co-operatives form a small portion of the existing co-operatives in the United States. Some of the oldest industrial co-operatives in the United States are the plywood co-operatives, formed in the 1920's and 1930's. Of the approximately thirty plywood co-operatives formed during that period, sixteen are still in operation. n211 Many of these co-operatives are run quite democratically, with workers serving on the boards of directors and either electing a manager from among themselves or hiring a manager from the outside. n212 The manager usually has a limit for spending without board approval, but a membership vote is often required for expenditures in excess of $ 25,000 or some similar figure. n213 Members frequently have the right to appeal any disciplinary action to the board of directors and then to the membership. n214 Since the directors work on the shop floor, rank and file members have constant contact with the board and are able to exert a considerable degree of informal control. n215 Elected managers may often believe that they do not always act in the best long-range interest of the firm because of their short-range political needs to remain popular. Thus, they may defer major purchases to provide more cash in pay or in dividends to the members. n216 Not all the plywood co-operatives, however, are run democratically. Often the nonmmeber manager hired from the outside has all the management powers of a conventional firm executive. n217

A number of studies have compared the performance of worker-owned plywood firms to that of conventional plywood firms. A United States tax court settlement and other studies show the plywood co-operatives to be twenty-five to sixty percent more productive than conventional mills. n218 However, the International [*770] Woodworkers of America (IWA) disputes the methods used to measure productivity, claiming that the mills compared in the studies engaged in very different types of work. n219

The plywood co-operatives generally were formed as new companies or successors to short-lived private companies. n220 This distinguishes them from the previous examples in which unionized employee groups purchased their former employers' companies which had been in existence for many years. In these cases the unions either have taken a leading role in organizing the employee-ownership attempt, or have at least retained a positive and necessary role in the eyes of the workers after the change in ownership. In contrast, most of the plywood co-operatives began as groups of unemployed lumberworkers who needed work rather than as unionized groups. n221 One of the exceptions is Everett Plywood, where the union has survived since the days the mill was privately owned. n222 Others, such as Hoquaim Plywood and North Pacific Plywood in the State of Washington, were purchased from former owners and then turned into co-operatives. n223

The ownership of the plywood co-operatives generally has been on the basis of one share per member. As the value of the companies has increased, shares which were originally worth $ 1500 to $ 2000 have risen in value to $ 25,000 to $ 50,000. Thus, younger workers often cannot afford to purchase a share in the company, and retiring workers often are forced to sell their shares to nonemployees in order to liquidate their share value. This has led some of the co-operatives to sell out to conglomerates, n224 while others have a substantial number of nonshareholder employees. n225 In many instances, the nonshareholder employees earn less money, are assigned the less desirable jobs and have fewer protections against improper discipline than shareholders have. n226

The IWA and the Lumber and Sawmill Workers affiliated with the United Brotherhood of Carpenters and Joiners of America, [*771] AFL-CIO (Carpenters) were both involved in a number of reported cases involving attempts to organize nonshareholder employees of these plywood co-operatives. n227 These cases illustrate the unwillingness of many of these co-operatives to become unionized. One of the main issues raised by the co-operative managements in these cases is the right of the shareholder employees to be included in bargaining units of nonshareholder employees. The National Labor Relations Board (NLRB) found that employee shareholders could be "employees" within the meaning of the National Labor Relations Act (NLRA), but that nonshareholder employees and shareholder employees could not be in the same bargaining unit if their interests conflicted. n228 Differences in decisionmaking power, disciplinary procedures, pay and job status were all considered indicia of such conflict. n229 Thus, at least the IWA has developed a rather negative impression of the plywood co-operatives as examples of continuing institutions of worker democracy. n230

Researchers refer to the ownership structures that make it difficult for new members to buy into these co-operatives as "examples of collective selfishness." n231 The IWA cites the case of NLRB v. Fort Vancouver Plywood Co. n232 to illustrate this phenomenon. n233 "In this case, the shareholder board of directors met in an emergency when learning of a union organizing drive among the nonshareholder workers and subsequently fired every one of the nonshareholders." n234 The NLRB and the Ninth Circuit found these actions to be blatant violations of the NLRA. n235

[*772] The Industrial Co-operative Association (ICA) n236 has studied the plywood co-operatives, as well as a number of other models, n237 and has attempted to devise workable models for overcoming the "collective selfishness" aspects of retaining all voting rights and equity within one share. n238 The ICA's basic formula is to separate voting rights from equity or economic profit rights in the company, whether the company is formed within the shell of a stock corporation or as a statutory co-operative. Each worker has one vote, based on membership in the co-operative, but each receives her dividend-type distributions to her internal capital account. Thus, when internal capital accounts are paid out, usually at least every five years and upon termination of employment, long-term employees will receive more than short-term employees because long-term employees have more equity. Under this system, new employees may become members without purchasing the entire equity of retiring members or diluting the equity of the older members. The newly createc co-operative ESOPs n239 have adopted some elements of this structure.

E. Nonmajority Stock Plans

Nonmajority stock plans in publicly traded companies are probably the most important types of plans to consider and study because most collective bargaining agreements are negotiated with large companies in which the employees cannot hope or expect to obtain majority control over the corporate board, at least in the foreseeable future. Approximately 5000 employee-ownership plans exist in the United States today. At least 250 companies of ten employees of more are majority employee-owned. n240 What, if any, is the value of such stock to employees or unions? The answer depends on the types of plans negotiated. Over time, a plan providing a small percentage of employee ownership in a closed trust controlled only [*773] by active employees possibly could develop into a significant voting bloc.

1. GENERAL MOTORS AND FORD TRASOPS

Nonmajority plans come in a variety of forms. The automobile company plans are typical examples. n241 In their 1979-82 collective bargaining agreements, the International Union United Automobile, Aerospace and Agricultural Implement Workers of America, AFL-CIO, CLC (UAW) negotiated TRASOP n242 -type employee stock ownership plans with Ford and General Motors (GM). The UAW negotiated a letter agreeing to establish a similar plan with Chrysler Corporation in their 1979-82 contract, which becomes effective when Chrysler reaches taxpaying status and the relevant tax credits become available. n243

Some of the TRASOP rules that were operative when these plans were negotiated include the following: 1) employee participation in a TRASOP must not be a condition of employment, n244 and 2) employer stock must be allocated to the employee-participant's account in amounts equal to the employee's contributions. n245 A TRASOP, unlike other ESOPs, requires a pass through of voting rights n246 and the use of voting stock; it cannot be used for leveraged borrowing; and it is limited to an amount of stock equal to 1.5% of the employer's investment tax credit each year in which the employer elects to take an investment tax credit, provided that the last one-half percent is matched by employee TRASOP contributions. n247 The accumulation of stock in the fund thus remains insignificant for a long period of time.

[*774] In the Ford n248 and GM n249 TRASOP plans, the company is defined as the administrator of the plan. The stock is common stock. Stock voting, dividend rights and investment credit language follow the requirements of the Internal Revenue Code. n250 The named fiduciary is the finance committee of the corporate board of directors. The employees' contributions to the plan, for the years in which they seek investment tax credits, will be contributions to all company ESOPs based on the compensation of each employee. There are separate plans for salaried and hourly employees, without an equal allocation to each employee's account.

Each employee has the right to direct the trustee to vote all of the employee's shares and fractional shares. Where the employee gives no direction to the trustee, the shares in the employee's account will not be voted. Participant shares are neither assignable nor transferrable except by death, mental incompetency, or upon a vested employee's termination of employment.

Thus, participants in these plans vote their stock through the trustee, but have no structurally established means of voting their stock as a bloc. n251 Under the Ford and GM TRASOPs, many members simply may not vote. Consequently their ownership rights will not benefit their fellow union members. In addition, there is no requirement to hold meetings at which issues before the stockholders might be explained and a union position decided. Thus, the hourly employees may unknowingly split their ESOT vote instructions to the trustee.

Voting rights in the Ford and GM plans are structured this way because the union decided, upon advice of counsel, that the TRASOP pass through voting requirements would make it quite difficult to arrange for bloc voting by the union. n252 Furthermore, the union believes it can adequately inform its members to vote the stock in their own interests when such a vote is meaningful and needed. n253 That belief is probably well founded over the short run, especially since there is usually an insignificant amount of total stock in the TRASOPs.

[*775] These TRASOPs are deliberately designed as individual employee benefits, without group accumulation and bloc-voting features. Since these plans require distribution of shares upon termination of the participant's employment, the trusts cannot accumulate a significant number of shares over time to create meaningful voting blocs. However, the 1981 amendment to section 409A(h)(2) of the Internal Revenue Code n254 allows for distributions of cash instead of stock where the employer's charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust (or an ESOP) plan. Thus, a TRASOP could be designed or later amended to hold substantially all of the employer's outstanding securities. n255

Even in their present form, TRASOPs provide benefits to both employers and employees. As the tax laws change and as the companies' needs for investment capital increase, the companies may find it necessary to consider broader ESOP plans. The unions also may demand stock in exchange for concessions. Already Congress has modified the TRASOP concept to benefit employers by changing the basis upon which investment tax credit ESOPs (TRASOPs) qualify. Beginning in 1983, the additional tax credits will be based on payroll n256 instead of capital investment. These may be called PAYSOPs.

2. CHRYSLER ESOP

The Chrysler ESOP plan illustrates how a company's need for financial assistance n257 can force the company to give its employees as ESOP plan that will give them, collectively, a substantial amount of stock over a relatively short period of time. In June 1981, [*776] Chrysler employees received over $ 40,000,000 of Chrysler stock under the ESOP mandated by Congress. Each of the 94,000 employees (67,000 UAW members) received sixty-six shares, valued at $ 441, which are held in the ESOP trust. n258 The employer pays all expenses, except taxes, of plan and trust fund administration, including trustee fees permitted by section 409A of the Internal Revenue Code.

Every person who was a Chrysler employee with nine months of continuous service on the effective date, working in an employee group whose compensation and benefits were modified pursuant to the Chrysler Corporation Loan Guarantee Act of 1979, is a plan participant. The Chrysler ESOP n259 is administered by a trustee appointed by the Retirement Fund Review Committee of the Chrysler Corporation Board of Directors. Each plan participant can direct the trustee to vote the shares of stock allocated to the participant. Any shares for which the trustee is given no direction are to be voted in proportion to the shares for which directions are given. Thus, the full weight of employee voting strength is exercised, although the ESOP participants do not have a majority-rule bloc vote.

The Chrysler ESOP has a Plan Board consisting of two UAW representatives and two corporation representations. They establish rules of plan administration with respect to eligibility, participation and benefit amounts, construe plan language, determine plan policy with respect to such items, and receive financial reports covering plan operations. There is also an ESOP Plan Committee established by the corporate board of directors, which has complete authority to control and manage the operation of the plan except regarding the matters reserved to the Plan Board. The Plan Committee is to adopt any Plan Board policies established within the Plan Board's jurisdiction.

Each year the Plan Committee allocates equally among the participants the corporation's contribution, if any, to the trust fund plan. Thus, the employees draw equally, not proportionally, based on rates of pay. The plan provides that the employer shall contribute not less than $ 162,500,000 before the end of 1984 in installments of not less than $ 40,625,000 per year. After 1984, the Chrysler Board of Directors may terminate the plan. The board of directors may amend the plan at any time with written notice to the Plan Committee [*777] and the trustee, but only if the purpose is to benefit the participants and beneficiaries. n260 Also, the corporation may not suspend, modify or change the plan prior to September 15, 1982 without first obtaining UAW concurrence. n261

Chrysler and the UAW further agreed in a letter of understanding attached to the plan n262 that: 1) where the members of the ESOP board are unable to resolve a matter within their power, the matter shall be referred to the Chrysler Vice President -- Employee and Industrial Relations Staff and the Director-Chrysler Department UAW, who shall agree upon a method of resolution; 2) a plan participant employee-stockholder shall not be prevented from attending an annual shareholder meeting of the corporation as an observer, but any absences from work for attending such meetings shall be treated as any other excused absence, requiring prior approvals based on operating efficiency needs and the employee's absence record; and 3) employee claims pursuant to the plan are to be processed pursuant to a special claim review procedure set forth in the Summary Plan Description and are not subject to the grievance procedure under any collective bargaining agreement between the parties.

Provided that Chrysler is still in existence in 1984, this plan could provide Chrysler employees with a significant voice in corporate decisionmaking, beyond whatever influence the appointment of UAW International President Douglas Fraser to the Chrysler Board may have. The ESOP will not have a majority interest in the corporation's stock in 1984, but will hold the largest bloc of corporate shares. The UAW estimates that at the end of the four-year period, the ESOP participants will own approximately fifteen percent of Chrysler's stock -- a rough calculation that will fluctuate based on stock prices and other Chrysler stock offerings. n263 That will make the ESOP participants collectively the single largest stockholder, since no other Chrysler stockholder holds five percent or more of Chrysler stock. n264 The next largest stockholder is the trustee of the Thrift Stock Ownership Program. n265

[*778] Thus, despite the fact that Chrysler does not have cumulative voting for board seats, n266 the UAW should be able to control more seats on the Chrysler board. Most Chrysler stockholders are individuals, not institutions. n267 Thus, in a proxy solicitation battle, the UAW might have as great an influence on the other stockholders as Chrysler management, although it should be noted that some ESOP participants and stock thrift plan stockholders are management employees.

3. PAN AMERICAN AIRLINES ESOPS AND BOARD SEATS

At Pan American World Airways (Pan Am), four of the five unions n268 that represent most of the company's hourly employees have agreed to a ten percent wage cut and a wage freeze through 1982 n269 in exchange for an agreement to create an ESOP. According to the agreement, the ESOP will give those employees between twelve to sixteen percent of Pan Am's stock during the first year of the agreement as well as the right to name one member of the board of directors. n270 Over a period of five to seven years, the ESOP participants may collectively acquire between twenty and thirty-five percent of the company's stock. n271 The unions believe this will lead to union control over four or five director positions n272 on a board of seventeen. The Pan Am union leaders interviewed did not believe the unions needed to control a majority of the board seats in order to achieve their goals of regaining the concessions made in the last collective bargaining agreement, increasing job security, and increasing their members' income by holding shares in a profitable company. The unions felt the company was being mismanaged financially [*779] and sought to have a union watchdog on the board to ensure that economically unsound decisions would not be made. The unions believe that even one director, trusted and chosen by them for his competence, can serve the necessary function. n273

In a going concern, employee interests may be served well enough by having one or two representatives on the corporate board to serve as watchdogs over the other directors and ensure that the union always knows the company's financial actions. If the union feels the company has been mismanaged, it may be valuable to the membership to exchange some of its fixed financial benefits for a watchdog and the attendant job security, as was done at Pan Am. In a company that needs a more drastic overhaul in management because of a great risk of total business failure, however, it might be unwise for union members to settle for less than a majority interest in the company.

Regardless of the union's share of interest in the company, union representation on a corporate board through nonmajority stock ownership may add to job security. Unions are hardest hit by plant closings when they have short notice because they have little time to defend the rights of their members or to convince management to change its mind. First, board representation will, in most cases, ensure substantially more union notice of plant closing plans, potentially at a stage of the discussions when the employer might be open to alternative proposals. n274 Second, the union would know of critical investment decisions, such as the decision to close a marginally profitable plant or to disinvest in United States plants in order to invest in, or contract from, foreign plants. Employee stockholders might consider a stockholder derivative suit, n275 or the union might consider other types of action to bring pressure on the company to attain greater job security.

While it is too early to conclude that nonmajority worker or union representation on corporate boards definitely will provide more job security, reinvestment in the United States or humane introduction [*780] of technology, it seems to be one of the few conceivable practical options for obtaining local control over corporations. In the Pan Am case, the unions are hopeful that their agreement will provide more job security. n276

III. LEGAL AND PRACTICAL ISSUES RAISED BY THESE EXPERIENCES

The involvement of unionized employees in the ownership, management or direction of corporations poses numerous legal questions. The legal issues raised fall into three categories: 1) potential conflicts of interest between the union's roles in representing employees as employees and in representing employees as owners on boards of directors; 2) union and employee concerns about protecting employee benefits on the one hand and obtaining more control over the employer on the other; and 3) government antitrust concerns.

These conflict of interest issues arise in many contexts. Nevertheless, a common theme connects and resolves most of these problems: employee-stockholders have employee rights when they act as employees and stockholder rights when they act as stockholders. A union may organize its stockholder members to aid them in acting collectively, but the union risks conflicts of interest when it becomes an institutional owner of a company for which it represents employees in collective bargaining. n277 Union representation on a corporate board of directors may occur by stockholder election, by corporate decision or through collective bargaining. Although the method of appointment may affect antitrust considerations, union representatives who sit on corporate boards must be aware of their legal obligations to the union, the government and the corporation regardless of their method of appointment.

A. Potential or Perceived Conflicts Of Interest Under the NLRA

1. "EMPLOYEE" STATUS UNDER LABOR LAW FOR EMPLOYEE-STOCKHOLDERS

The NLRB has considered, in a number of cases, whether employee-stockholders are "employees" under the National Labor Relations Act. n278 The Board determinations have depended on the procedural [*781] status of the case, n279 the degree of control employee-stockholders have over the board of directors and corporate decisionmaking, n280 and whether there is preferential treatment of employee-stockholders conflicting with the interests of nonstockholding [*782] employees. n281 The Board's basic rule is that an employee-stockholder is protected by the Act unless the employee-stockholder's interest gives him an "effective voice" in the formulation and determination of corporate policy. n282

There have been cases in which the Board has included employee-stockholders in bargaining units with nonstockholders, n283 has included employee-stockholders in units where all employees were stockholders, n284 has excluded from the bargaining unit employee-stockholders who were on the corporate board of directors, n285 has held that all employee-stockholders were nonemployees, n286 and has even included employee-stockholders serving on the board of directors in the bargaining unit. n287

Thus the Board has not automatically found employee-stockholders to be nonemployees under the Act in all situations in which there were both stockholder and nonstockholder employees. n288 However, when preferential treatment is accorded to stockholder employees, they must, at least, be in a separate bargaining unit from nonstockholder employees or they must be excluded totally from [*783] the bargaining unit. n289 The Board's exclusion of stockholders from units including nonstockholders, especially where the stockholders received preferential treatment, logically follows the basic principle of bargaining units: they must represent a "community of interest." Significantly, none of these cases exclude employee-stockholders from protection of the Act in situations in which no conflict of interest would arise within the unit, i.e., where all employees are stockholders.

In Everett Plywood and Door Corp., n290 where all the employees were stockholders, the Board found employee-stockholders n291 to be employees within the meaning of the Act, despite the fact that each had "all the rights and privileges of a stockholder." n292 It is not clear what type of voting rights the employee-stockholders had, but since their structure was referred to as a "co-operative set-up" one could assume they had one vote per person. They also had a guaranteed wage and special rights to a hearing before the board of directors in the event of a discharge by the manager. The board of directors, not management, had ultimate discharge authority. Thus, Everett Plywood stands for the proposition that the Board's "effective voice in management" rule does not apply to 100% employee-owned firms. As the Board stated:

The mere fact that an employee also has the rights and privileges of a stockholder is not sufficient to debar him from availing himself, in his capacity as an employee, of the rights of employees to engage in concerted activities for the purposes of collective bargaining or other mutual aid or protection. . . . [S]tockholder employees not only have a proprietary interest in the employer-corporation, but also have an interest, at least as great, in their status as paid workers. n293

2. THE DUTY TO BARGAIN OVER EMPLOYEE RIGHTS IN STOCK PLANS

Although employees must receive voting stock in TRASOP [*784] plans, n294 ESOP plans may give nonvoting stock. n295 It would be unreasonable for all unions, especially in potential buyout situations, to insist on TRASOPs instead of ESOPs since the quantity of stock that may be transferred through a TRASOP is much more limited than through an ESOP. n296 Regardless of the specific stock transfer arrangement, the voting structure will determine whether the employee stock will be maintained as a bloc, whether it will be individually owned, whether the democratic principle of one vote per person will prevail, and what role, if any, the union will play in organizing or directing the use of the vote.

The unions' experiences at South Bend Lathe, Vermont Asbestos Group and Rath Packing illustrate the importance of obtaining favorable voting arrangements in a stock plan at the tim the plan is initially created. n297 At South Bend Lathe n298 the employees did not obtain any significant voting rights during at least the first five years of the ESOP despite their ownership of 100% of the company's stock. At Chicago and North Western Transportation Company n299 and Vermont Asbestos Group, n300 the employees received stock as individuals, thus making it possible for the stock to be sold to a few major investors, and for employee control to be diluted. Rath Packing n301 provides the best example to date of a unionized ESOP in which the power of a bloc vote and democratic principles have been combined to maximize the use of employee stock ownership for the interests of present and future employees. Recent changes in the law n302 make further improvements in the Rath model possible. n303

In the case of South Bend Lathe, the employees' lack of voting rights led to a strike over a number of issues related to the employees' lack of voice in company decisions. Although the parties may [*785] avoid direct joinder of this issue in their upcoming negotiations as well as in possible NLRB litigation, the South Bend Lathe situation poses the question of whether the subject of employee voting rights is a mandatory subject of bargaining.

What portions of employee stock plans are mandatory subjects of bargaining? In Richfield Oil Corp., n304 the Board held, and the District of Columbia Court of Appeals affirmed, that a voluntary employee stock purchase plan unilaterally announced by the employer "represent[ed] a mandatory subject of collective bargaining" n305 with regard to all the plan items that the union sought to negotiate. n306 The employer had maintained that the purpose of the plan was "to foster a closer and continuing association" between the employer and its employees n307 and to create an incentive for employees to invest in the company. n308 The employer then argued that such a program could not be subject to mandatory bargaining because to do so would be tantamount to requiring bargaining about ownership and control of the company, and could "result in the union's obtaining a seat on both sides of the bargaining table. . . ." n309 The Board and the court of appeals rejected this argument, finding that the employer's duty to bargain over the stock purchase plan arose from the plan's status as both deferred "wages" and as a "condition of employment." n310

Richfield Oil and similar cases n311 establish that all items in an ESOP or other employee stock plan concerning compensation or the accumulation of credits are mandatory subjects of bargaining. [*786] Voting rights were not an issue in Richfield Oil. n312 However, dicta in Richfield Oil regarding other types of stockholder rights needs to be analyzed in light of today's bargaining situations. Although the union in Richfield Oil made no bargaining demands over these issues, the Board stated:

On the occasion of stockholder meetings, corporate elections, or any other matter in which only stockholders have the right to be heard, the union has no voice whatever as a statutory representative.

It by no means follows that the effect of our decision here is to require the Respondent to bargain with respect to its dividend, debt, and financial policies, simply because, as the dissenting opinion would have it, such matters are "relevant" to the establishment of a stock purchase plan. Indeed, these factors are no less relevant where a union seeks to bargain about higher wages, pension plans, or profit sharing plans, all of which have been held by this Board and by the courts to be subjects of mandatory collective bargaining. Yet, no one can seriously contend that those decisions have forced employers to bargain as to their dividend, debt, or financial policies. n313

The Board made these statements in response to claims by the respondent and the dissent that to allow union bargaining about the stock plan would permit the union "to interfere with matters solely within the province of management" n314 and to have "an inconsistent dual role" disallowed by the Board in Bausch & Lomb Optical Company. n315 The Board majority in Richfield Oil specifically distinguished the stock purchase plan therein from the union ownership arrangement in Bausch & Lomb, n316 stating "the Union would not, as a consequence of employees acquiring stock in the Respondent occupy a dual capacity as alleged by the Respondent." n317

The Richfield Oil stock plan was created for a much different purpose than many of the current stock plans discussed above which were created to save failing employers. n318 Since the Richfield [*787] Oil stock plan was imposed unilaterally, the union clearly was not asked to take wage, benefit or other concessions in order to obtain the benefits of the stock plan. This is the crucial fact that distinguishes it from stock plans inaugurated to help capitalize and save a troubled company, such as Chrysler, or to effect a total purchase of the company by its employees to save their jobs, as in the cases of South Bend Lathe, Hyatt-Clark and Rath Packing. In each of these more recent plans, the quid pro quo for creation of the stock plan was an agreement to give up some already negotiated benefit. n319 In each of these cases, the stock plan concerned more than mere wages, and had a significant effect on the lives of the employees involved. Adoption of the plan usually meant agreeing to give up some of the financial security won through long union struggles and taking on some of the employer's entrepreneurial risk in order to save the company and their jobs. In each of these cases, the creation of the plan and its terms "vitally affected" the working conditions, indeed the continued existence, of the employees' employment.

In such cases, the union involved in negotiating the stock plan should not be limited to negotiation of only the financial and benefit computation aspects of the plan. At least in situations where the employees are forced by external economic circumstances to leap into entrepreneurial risk by agreeing to a stock plan in exchange for some previously negotiated pay or benefits, all aspects of the plan, including voting rights, must be mandatory subjects of bargaining. Otherwise, employees faced with the terrifying prospect of losing jobs in a failing economy are forced to be sitting ducks and easy prey for ESOP promoters. n320 Because of fear, disorganization and the need for speed in closing the deal when financing becomes available [*788] in a plant buyout situation, it is not always possible for the parties to develop the best stock-ownership arrangements at the time a worker buyout or stock plan is created. However, such contingencies should not forever doom the employees to existence under an unfair plan, which they made possible by giving up some negotiated benefits.

The purposes of labor law are not served by preventing unions from demanding voting rights in stock plans to the point of impasse. The concept of management rights, protected by labor law, protects the interests of the equityholders or stockholders from undue interference from labor. However, the balance of legal equities shifts when the majority of stockholders are employees represented by the union. Employees, as majority stockholders, should be able to enjoy the rights and privileges of majority stockholders. If their trusted collective voice is their union, it should be treated no differently than any other proxyholder. Otherwise, as in the case of South Bend Lathe, a minority stockholder or stockholder's group, usually made up of management employees, can obtain exclusive control over the company. If they devise an ESOP that allows them to control the appointment of ESOT trustees they can control the votes of the union member employee-stockholders' shares and are not accountable to the majority of the stockholders.

Furthermore, in such a situation, the concept of management rights is not truly a protection of ownership or property rights. It is, in fact, a counterfeit argument aimed at giving managers rights in their capacity as managers that do not derive from property rights and thus are not legitimate for consideration in the balance struck by labor law between the rights of property and the rights to organize and bargain.

Finally, union negotiation for employees in obtaining rights to vote the stock they have acquired as compensation is not the same as a union seeking representation in its capacity as a union on both sides of the bargaining table. Bargaining to obtain the right for employees to vote their stock is not the same thing as voting it for them. n321

3. THE UNION'S DUAL ROLE AS BARGAINING AGENT AND COMPETITOR

The NLRB and the courts have considered cases in which employers [*789] have refused to bargain with unions because of union ownership of stock in a competitor or loans made by a union-controlled pension fund to a competitor. Stock ownership by union members in their own employer, however, is legally distinguishable from stock ownership by the union or union pension fund in the employer or one of its competitors because their potential conflicts of interest differ.

In Bausch & Lomb Optical Co. and United Optical & Instrument Workers of America, Local 678, n322 the Board held that the employer did not violate section 8(a)(5) n323 of the NLRA by refusing to bargain with the union, with which it had an ongoing bargaining relationship, after the union set up an optical business in direct competition with it. Union memebership was a prerequisite to stock ownership in the new company, and the union admitted that it controlled the new company. The Board reasoned that the union might bargain in bad faith to improve its own company's position at the expense of Bausch & Lomb. Through excessive bargaining demands, strikes, hard bargaining and control over the relevant labor market, the union could increase Bausch & Lomb's labor costs or put it out of business. n324

In NLRB v. David Buttrick Co., n325 the First Circuit initially refused to enforce a section 8(a)(5) bargaining order against Buttrick on the basis of Buttrick's claim that the international union's pension fund had made a substantial loan to one of Buttrick's competitors, Whiting Milk Company, which gave the pension fund trustees control of Whiting Milk as collateral. The court remanded the case to the Board for further investigation of the possibility of intervention and asked the Board to promulgate guidelines. The Board originally had ordered bargaining because it found the connection between the fund and the local was not "definite and substantial" and thus the nature of the potential conflict was too speculative to disqualify the local. n326 Upon remand, the Board found no evidence that [*790] Whiting Milk's financial condition was likely to cause any pressure to secure the loan, and that the international had limited powers over the local. Thus, the Board maintained its position, but declined to issue guidelines. The First Circuit endorsed the NLRB's second bargaining order emphasizing the "strong public policy favoring the free choice of a bargaining agent by employees." n327

The principles of Bausch & Lomb and Buttrick, n328 however, do not apply to a situation in which the employees own stock in their employer. Unlike unions that own a competing business or have union-controlled pension funds invested in a competing employer, individual union members who own stock in their own employer are in no sense competing with their employer. Accordingly, the conflicts of interest suggested in the above cited cases do not exist. They have even more reason to keep their employer afloat and competitive in the market than they may have had as mere employees. As employee-stockholders, they may depend on their employer's success not only for their jobs, but often to protect their lifesavings and, in some cases, their pensions. In those circumstances, the union is no more sitting on both sides of the bargaining table than the employer is sitting in the union meetings. Although the adversary lines may blur as employer and employee interests in the company's survival merge, nothing in labor law policy frowns upon such an arrangement so long as the conflicts of interest that could exist within a bargaining unit of stockholder and nonstockholder employees n329 are not present, and so long as the union's fiduciary and representational duties are not compromised. n330

Since employee-owned firms are not necessarily managed in a democratic fashion, unionized workers may still need a union even though they have obtained some ownership interest in a firm. Ownership is not necessarily control. Whoever runs the company, individual employees still need a union's protection from unfair action. Everett Plywood confirms that an employee's status as a stockholder does not per se bar her from exercising rights as an employee [*791] under the NLRA. n331

4. EMPLOYER DOMINATION OF THE UNION

Employer domination of the union in violation of section 8(a)(2) of the NLRA, n332 and union interference with the employer's right to select its representation for collective bargaining or adjustment of grievances prohibited by NLRA section 8(b)(1)(B) n333 are two similar potential problems arising from union representation on corporate boards. n334 There are a number of cases that address the issue of employer domination of a union in violation of NLRA section 8(a)(2), where union representatives sit on an institution's board of trustees or directors and the union also represents the institution's employees. These cases have arisen primarily at health care institutions connected to, or serving, a substantial number of patients under union health and welfare plans. n335

The NLRB has declined to provide precise guidelines n336 for determining when such a conflict of interest exists. On a case-by-case basis, it has developed review criteria. There is still debate over whether there must be some evidence that union-employer-trustees have actually abused their influence over the union, interfering with the union's ability to single-mindedly represent the employees, or whether the mere potential for such abuse, if great enough, violates section 8(a)(2).

In cases where the majority of an institution's board of trustees or directors were officers, agents, members or retired members of a union that also represented the institution's employees, n337 the Board has held that there was a conflict of interest in violation of NLRA section 8(a)(2). In most of these cases, n338 the institution also received the majority of its revenue from a union health care plan or [*792] union members. n339 The Board found that the union's domination of the institution's board and the union's substantial interest in the clinic's prosperity created dual roles in collective bargaining. n340 The interrelationship of powers, interests and temptations constituted conflicts of interest creating a "proximate danger of infection of the bargaining process." n341 In determining whether there is such a "proximate danger," the Board and the courts consider the amount of influence the union representatives have on the corporate board, the amount of control the union has over the people who actually bargain for the employees and the amount of temptation the situation gives the union to exert such control. n342

[*793] Thus, the Board has found an actual conflict of interest in violation of section 8(a)(2) where a high-ranking union official was the employer's collective bargaining representative who actually sat on the opposite side of the table from a union staff person representing the employees. n343 In one such case, the hearing officer suggested that the conflict could be remedied by a change in employer negotiators, n344 but the Board did not agree. n345

In Anchorage Community Hospital, n346 however, the NLRB found the Teamsters should not be disqualified as the hospital employees' exclusive bargaining agent even though Teamster officials and representatives comprised seven of the fifteen member hospital board of trustees. Two additional board members were also affiliated with the Teamsters, as the administrator and the officer of a Teamsters employer health and welfare trust fund. Thus, the Teamsters were one seat short of a majority, or actually comprised a majority if the latter two individuals from the trust fund were counted. Four of the Teamsters-affiliated people sat on the hospital's five member executive committee. The Teamsters also had made a ten million dollar construction loan to the hospital. Ten percent of the hospital's gross revenue came from medical services purchased by the Teamsters-Employees Trust Fund. n347 In this case, the NLRB established the principle that minority representation on an employer's board of trustees and executive committee does not establish a conflict of interest absent evidence to indicate "abuse [of] that role." n348 Thus, minority union representation on a corporate board is likely to be held to a standard of actual abuse, rather than potential abuse.

Union representatives elected to a corporate board by employee stockholders, whether they constitute a majority or minority of the board are distinguishable from clinic and hospital trustees, who are usually appointed. n349 Whereas clinic and hospital trustees may be appointed by an international union, which can have great power over a local, a corporate board member, elected by the stockholder constituency over which he presides, is more directly accountable [*794] to that stockholder constituency, whether local or national, than is an international appointee. Therefore, the "control" aspect of the above-stated test is not as great a problem. Further, an employee-stockholder representative may have more factors balancing against the "temptation" to consider the employer's benefit over the employees' than an international appointee. Usually he is an employee who must live with the conditions he helps create. Secondly, since he is elected to the board position, he has a constituency to please or he can be unseated. However, an elected employee-stockholder may be less sophisticated about potential conflicts of interest than a union-appointee.

In UMWA Welfare and Retirement Fund, n350 the NLRB indicated that an NLRB election might resolve a conflict evidenced by employer financial assistance to the local union, which the employer had voluntarily recognized as its employees' collective bargaining representative based on a union-run vote. Although a union-appointed representative sat on the employer's board, the NLRB found no section 8(a)(2) violation on that basis because the union did not have majority control of the board.

Finally, in addition to the question of union representation on employer boards, it is possible that the company may cooperate more with the union as it establishes a voice in the company, perhaps providing meeting facilities or allowing meetings on company time. There are a series of section 8(a)(2) cases in which the courts of appeals and the NLRB have found that labor-management cooperation does not constitute illegal section 8(a)(2) domination, although the Board and the courts have not agreed in all cases. n351

[*795] 5. UNION COERCION OF THE EMPLOYER'S CHOICE OF BARGAINING REPRESENTATIVE

Mere cooperation between the parties is also unlikely to create a violation of NLRB section 8(b)(1)(B), which prohibits union interference with an employer in selecting its bargaining representative. Conceivably, a stockholder or a board of directors fight over the employer's choice of bargaining representatives led by either union stockholders or board members could result in such a charge. However, a section 8(b)(1)(B) violation usually requires some sort of threat or coercive act.

Although not directly on point, NLRB v. Amax Coal n352 is a recent illustrative case including section 8(b)(1)(B) charges. In Amax Coal, a union struck to induce an employer to join a multiemployer national trust fund for employee pension and welfare benefits. Amax filed section 8(b)(1)(B) charges claiming that the management-appointed trustee of the national trust fund was a "collective bargaining representative" whose appointment the union had no right to try to influence. The United States Supreme Court held that the management-appointed trustee was not a collective bargaining representative because the trust fund was an employee benefit plan. The trustee's function was to hold the plan assets for the sole benefit of the employee beneficiaries and the trustee was not to serve in the adversary role of a collective bargaining representative. Thus, the union did not violate section 8(b)(1)(B).

Just as the Court in Amax Coal looked to the underlying purpose of the trust fund and the proper role of a trustee, a court should distinguish between a union qua union, using its typical weapons such as strikes or job actions to obtain a change in employer bargaining representatives, and a group of stockholders or directors using their corporate powers to seek a change in management personnel or policy. The use of corporate powers to change management direction is well within the proper authority of board or stockholder [*796] action. n353

B. Potential Fair Representation Problems for Unions with Employee-Stockholder Members

The duty of fair representation is a judicially created doctrine emanating from the principle that a union, which has been given exclusive bargaining recognition by law, must treat all unit employees in a manner that is not arbitrary, capricious, discriminatory or in bad faith. n354 The cases provide a union more latitude in negotiating contract language than in administering contracts, however, because in contract negotiations the union necessarily must trade off the interests of some members to obtain the greatest good for the greatest number. n355 Few recorded duty of fair representation cases concern employee stock plans, although there are numerous ways a union might be exposed to such liability. This article is limited to some of the concerns that have already been raised.

In Bodecker v. Local Union No. P-46, n356 Rath Packing employees, brought suit against the union and the employer pursuant to section 301 of the NLRA, as amended, n357 and the Iowa Wage and Hour Law. The employees claimed that by amending the collective bargaining agreement to establish stock acquisition and profit sharing plans founded by payroll deferrals, the union acquiesced in allowing the employer to withhold or defer wages owed to the employees under the collective bargaining agreement. The Eighth Circuit Court of Appeals upheld the district court's denial of plaintiffs' motions for preliminary and permanent injunctions and its findings that: 1) the district court was without jurisdiction to issue an injunction under the Norris-LaGuardia Act n358 because the plaintiffs' claim involved a labor dispute; 2) the union and its president had not breached any duty of fair representation owed the plaintiffs since all changes in negotiated benefits had been bargained collectively by the union and ratified by the union membership following the procedures provided in the union constitution and bylaws; 3) compliance with the Iowa statute was not required because wage or benefit deferrals were made pursuant to a valid collective bargaining agreement; and 4) even if the Iowa statute applied, it was preempted [*797] by federal law. n359

The Hyatt-Clark ESOP n360 has produced several duty of fair representation concerns. First, the local union's request to the international union for a five million dollar loan raised fairness and fiduciary questions concerning the international union's allocation of its resources. n361 If it provided one local union a capital loan to aid them in a plant buyout, would it then be liable to provide such loans to any local union that made such a request? One such loan could become the basis for fair representation claims by other local unions that were denied such loans. However, if an international union developed a policy that set objective criteria for providing such loans to its locals, or if it devised a limited revolving loan fund available on a first-come, first-serve basis to local unions fitting designated criteria, it could meet its fiduciary obligations to the membership at large while providing a useful service to those local unions where both the circumstances and initiative exist for making a realistic attempt at employee ownership.

Second, in order to obtain funds for a feasibility study, the Local 736 leadership at Hyatt-Clark originally asked the membership to tax themselves as union members an assessment of thirty-five dollars each to pay for the study. n362 This proposal was defeated. A committee of UAW members and management employees then was formed to raise funds for the feasibility study. They sought a $ 100 contribution per member. Union members were induced to join this committee and pay the $ 100 by a promise of preferential hiring status and, implicitly, higher seniority in the ESOP company than those who did not contribute. n363

A group of UAW Local 736 members filed a duty of fair representation suit, claiming that the local leadership's effort to create the ESOP after the local officially had decided not to tax members to pay for the study, was a breach of their obligation to carry out the will of the members. n364 This case seems unlikely to succeed because: 1) no grievance was filed; 2) no internal union redress was sought; 3) apparently no union funds were diverted to the ESOP company; and 4) under successorship principles, the new company may negotiate [*798] a new collective bargaining agreement, and thus new seniority provisions, with a union with which it has a duty to bargain. This case, however, raises questions about the propriety of a union allowing its members to alter their seniority by paying money. The strength of the successorship clause with the original employer and the timing of negotiations on altered seniority could be key factors in a plaintiff's case under similar circumstances. n365

In Baker v. Amsted Industries, Inc., n366 several South Bend Lathe employees sued Amsted for breach of contract and the union for violating its duty of fair representation when the union did not bring suit against Amsted to recover pension payments due after Amsted's July 3, 1975 sale of its South Bend Lathe Division to SBL, Inc. The Amsted collective bargaining agreement ran from October 1974 through October 1977. SBL hired all union-represented employees, including the four plaintiffs, and adopted most of the Amsted collective bargaining agreement provisions except for the pension provisions, which it unilaterally replaced with the ESOP. The union negotiated with both employers to no avail and then sued both to compel tripartite arbitration of the pension matter. The district court denied the request to compel tripartite arbitration, but granted the union leave to reinstate proceedings against Amsted Industries, Inc., in the event that Amsted failed to arbitrate bilaterally. n367 Thereafter, the union sued only SBL, Inc., choosing to wait until the outcome of that litigation before suing Amsted again, on the theory that if it won all pension benefits due since the date of sale from SBL, Amsted would have no liability. Amsted had previously agreed to pay any benefits due to pension eligible employees and retirees as of the date of sale. Thus, the plaintiffs' suit was a challenge to the union's litigation strategy.

The Seventh Circuit Court of Appeals in Baker found the union's litigation strategy reasonable and affirmed the lower court's decision that the union had not breached its duty of fair representation. The court stated:

Even if the union's litigation strategy were subsequently determined to be misconceived, it would be excessively intrusive into Union decision-making for the courts to decide, in the absence of bad faith or egregious conduct, whether the Union has pursued the tactics most appropriate to [*799] the aggrieved employees' needs. n368

Finally, in a recent duty of fair representation case, a union was held liable for an employer pension default because an international union representative sat on the pension plan board of trustees. n369 A union has also been held liable in a wrongful death suit where the collective bargaining agreement stated that the union was fully responsible for the enforcement of certain occupational safety provisions. n370 In both cases, the court's rationale was that the union had assumed an oversight or enforcement role that made it responsible for injury to employees. Although to date no case has arisen in an employee stock plan situation, union counsel have expressed concern that a union might be liable for the total investment lost by members who have invested their savings, pensions, wage or benefit concessions in a stock plan or other purchase scheme on the advice of the union staff. n371

Employees faced with a closing plant are generally desperately trying to save their jobs, and are often willing to try almost anything to do so. They seek advice, technical assistance and often money from the union. n372 Care must be exercised in any stock plan situation, especially in a buyout, so that a union does not become a guarantor of the business proposition involved. A union may give its members the information and assistance they seek, but needs to protect itself from making any guarantees about the feasibility of a project. Employees who may invest their savings in their failing employer must know the risks involved and take responsibility for those risks themselves. Without becoming an insurer of the plan, perhaps by means of specific disclaimers, union research and legal [*800] staff may be the best resources available to a local union in finding qualified professionals to provide a feasibility study and other assistance.

C. Potential Conflicts of Interest under the Landrum-Griffin Act and the Antitrust Laws for Union Officers or Agents on Corporate Boards of Directors

Unlike the above-mentioned NLRA and duty of fair representation issues, which do not present major obstacles to employee-ownership schemes, the Landrum-Griffin Act and the antitrust laws contain some specific requirements that must be met to ensure the legality of a plan. At any unionized company where the parties are considering employee ownership, they must consider the following potential conflicts of interest and design the employee-ownership plan accordingly.

1. LANDRUM-GRIFFIN ACT

a. Payments to union officers

Sections 302(a) and (b) of the Taft-Hartley Act, n373 as amended by section 505 of the Labor-Management Reporting and Disclosure Act of 1959 (L.M.R.D.A., also known as the Landrum-Griffin Act), n374 make it unlawful for an employer to pay an money or other thing of value to any labor organization or officer that represents any of that employer's employees, and for any person to receive any such payment. Thus, a union officer or agent who might be appointed or elected to serve on a corporate board should not accept any payment of fees normally paid to corporate directors.

In its letter of opinion to the United Auto Workers (UAW) concerning the possible appointment of a union member or representative to the American Motors Corporation (AMC) Board of Directors, the Department of Labor stated that: 1) section 302 did not apply to any director fees, since the UAW and AMC had agreed that neither the union director nor the union would receive the normal fees paid to directors; n375 and 2) it would not be improper "for AMC to pay necessary expenses, such as hotel accommodations, incurred by the UAW member in his or her capacity as a member of the board [*801] of directors." n376

b. Investing union money in employer stock

Section 501(a) of L.M.R.D.A. n377 provides that officers, agents and representatives of a labor organization hold positions of trust as fiduciaries in relation to the union and its members. This duty requires that such officers and agents hold, manage, invest and expend the money and property of the union solely for its benefit in accordance with its constitution, bylaws and resolutions. Such officers and agents must neither hold nor acquire any pecuniary or personal interest that conflicts with the interests of the union. They also must provide an accounting for any profits they receive in any capacity connected with transactions conducted by them or under their direction on the union's behalf. n378

Section 501 may present a problem for a union that seeks to invest union funds in an employer's stock. n379 This problem might be overcome by a carefully worded union resolution n380 and an arm's-length union-employer transaction that is commercially sound. In general, it is probably best for the employees to invest their own funds instead of using union funds, even if the stock purchase is through a payroll checkoff.

c. Holding of employer stock by union officers and agents

L.M.R.D.A. section 501 fiduciary obligations may also present problems for union officers and agents who wish to hold employer stock. In addition, some union constitutions prohibit or place limits on the holding of stock by union officers or staff. n381 Such limitations [*802] must be considered, and/or the union constitutions must be amended before a stock-ownership plan is adopted. n382

At Rath Packing Company, the union circumvented the section 501 fiduciary problem with the following provision: "All members of the Board of Trustees are required to be participants in the ESOP. However, no officer, employee, agent or representative of any union is eligible to serve as a member of the Board of Trustees." n383 The trustees of the ESOT hold the actual title and voting rights to all the employees' stock held in the plan. The fact that no union officers actually hold this financial interest in the company avoids any section 501 problems. Furthermore, union officers at Rath may and do serve on the corporate board of directors n384 since their personal stock ownership is only part of their regular compensation under the terms of the collective bargaining agreement that established the ESOP. n385

d. Reporting requirements

L.M.R.D.A. section 202(a)(1) n386 requires every officer and employee of a union to report annually any stock held or any income derived from any employer whose employees his labor organization represents beyond normal compensation for his work as an employee of the employer. n387 Section 203(a) requires every employee of a labor organization. n388 Depending on the profitability of the company and the plan arrangements, stock dividends may be considered only remuneration for work and thus outside the reporting requirement. However, it is worthwhile to check with the Department of Labor to determine what reports will be required for a particular plan.

L.M.R.D.A. section 202(a)(5) requires every union officer and employee to report each fiscal year "any direct or indirect business [*803] transaction or arrangement between him . . . and any employer whose employees his organization represents." n389 In the UAW-AMC case, the Department of Labor determined that "it is possible that the arrangement by which a UAW member is elected to and serves on the Board of Directors could be construed as a 'business arrangement' under this section. Therefore, as a precautionary measure, the union officer should file such a report." n390

2. ANTITRUST IMPLICATIONS

Union representation on boards of competing firms in the same industry raises antitrust issues. The concern is that union representives on boards of competing firms would have both the motivation and the opportunity to engage in price fixing, n391 contrary to the purposes of the Sherman n392 and Clayton n393 Antitrust Acts. n394 However, one commentator who raises this concern notes that "illegality would only attach to a labor union interlock if an actual conspiracy in restraint of trade could be proven under the Sherman Act or Federal Trade Commission Act." n395 He further concludes that section 8 n396 of the Clayton Act does not prohibit many kinds of "indirect interlocks" between corporations so long as one individual is [*804] not a director of two competing corporations. n397

Section 6 of the Clayton Act n398 might exempt union representatives on corporate boards from antitrust law coverage. Section 6 provides, in part: "Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, and horticultural organizations . . . or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof. . . ." In the context of union representation on corporate boards, however, no court has yet decided whether interlocking directorates are "legitimate objects" of labor organizations, n399 thus exempting them from antitrust coverage.

The Federal Trade Commission and the United States Department of Justice-Antitrust Division recently considered these issues in advisory opinions rendered to the UAW concerning an agreement with AMC. During their 1980 contract negotiations, the UAW and AMC agreed that AMC would nominate a UAW member, other than [*805] UAW President Douglas Fraser, who has served on Chrysler's board, to serve on its board contingent upon determinations of "legal acceptability" to the Federal Trade Commission, the Department of Justice and the Department of Labor.

In its opinion letter, the Federal Trade Commission (FTC) n400 stated the issues presented to it as follows:

It appears that Chrysler and AMC are competitors, that they satisfy the size requirement contained in section 8, and they engage in interstate commerce. Thus, some elements of a violation are present, and the law would be violated if the same person were a director of both companies and if no exemption from the antitrust laws were applicable. This letter, therefore, focuses on the issue of whether the UAW is a "person" within the meaning of section 8 and, if so, whether it would be a "director" of AMC and Chrysler in the circumstances described . . . and . . . whether the labor feature of the arrangement renders section 8 inapplicable. n401

The FTC concluded that the proposed UAW representative on the AMC board would not give rise to a violation of section 8:

[W]e do not believe section 8 was intended to reach interlocking directorates formed through "representatives" of a common labor union. Such a construction of section 8 would extend its reach beyond the situations, which Congress intended to be per se unlawful and might preclude particular labor-management relationships which may not present the risk of competitive harm at which section 8 was aimed. Consequently, we do not believe that section 8 should be construed to make unlawful the type of labor-management experiment at issue here.

Further, the UAW has made clear . . . that it intends that the director on the AMC board will function independently and will refrain from sharing confidential commercial information with other union officials, including the UAW director of the Chrysler board. The proposed arrangement arises in the novel context of worker involvement in the affairs of corporate management with expressed aims that do not raise section 8 concerns. On these facts . . . we do not believe a "representative" relationship for the purpose of section 8 is present. n402

The Department of Justice-Antitrust Division, however, refused to issue a "no action" letter. n403 Adhering to the government's position that a "corporation or association" can be a "person" within the meaning of section 8, the Antitrust Division determined [*806] that a union might also be such a person. In considering "the question of whether a 'corporation or association' is on the board of two companies," the Antitrust Division stated:

[This question] is normally a factual issue, in part turning upon the existence and strength of any interest the third party corporation or association might have in the operation of either or both of the competing companies, and the nature of the relationship between the individual directors and the third party corporation or association. It may be . . . in a given case . . . shown that the directors in question are acting purely as individuals. On the other hand, it may be that the third party has such an interest in the activities of the competing companies, and has such control over the individual directors, that they should be considered to be serving not merely as individuals, but as representatives of that third party. The legality of the UAW's proposal thus depends on the resolution of a factual question: will it be in fact the UAW that sits on the boards of both AMC and Chrysler? n404

Although the Antitrust Division refused to determine whether the UAW member would be sitting on the AMC board in a basically representative as opposed to individual capacity, the Antitrust Division analyzed the facts of the case at length. The Antitrust Division emphasized two facts as raising potential problems: 1) that the union demanded and gained the agreement to nominate a UAW member to the AMC board in collective bargaining negotiations; and 2) that the UAW may have an interest in influencing the commercial and financial affairs of the major automakers, although this [*807] interest was seen as "only indirect." n405 The Antitrust Division ultimately refused to issue the "no action" letter stating:

We are unable to conclude on the present record that the antitrust questions raised by your proposal have been resolved -- the uncertainties inherent in this case are too numerous and too important, particularly in view of the origin, indefinite duration and possibly changing nature of the proposed relationship. n406

The Antitrust Division's reasoning focused heavily on the fact that the UAW had sought its position on the AMC board through collective bargaining. One resolution of this issue would be to obtain employee or union representation on a corporate board through voting of employee stock rather than through collective bargaining. A union member employee-stockholder, elected to a corporate board would be in a much better position to claim her board status as an individual stockholder than would a board member who obtained her seat purely as a result of a bargaining demand. A union member appointed to a board without negotiation also cannot be labelled as one who attained the position as a result of bargaining. Furthermore, an ESOP elected board representative would most likely fall outside the category of union "director," thereby avoiding the problem of "direct interlock" and serving as a union "representative" in the opinion of the FTC and the Antitrust Division.

An ESOP in a unionized shop can provide a useful means of creating a de facto union voting bloc of employee-stockholders without running afoul of antitrust laws. For example, although the employee-stockholders at Rath Packing Company vote their ESOP shares in a bloc, n407 any union representative who serves on the board [*808] is actually el