DEBORAH GROBAN OLSON
ATTORNEY AT LAW
1021 Nottingham Road
Grosse Pointe Park, Michigan 48230
Phone (313) 331 7821
Fax (313) 331 2567
Email dgo@esoplaw.com
Carris Reels, Inc. is a family owned company with 710 employees in 15 plants in eight states and sales estimated at $83 million in 1995. The Company was started in 1951, by Henry Carris with 2 employees. In 1980 Henry retired and was succeeded by his son, Bill Carris. Carris Reels has been supplying wood, metal and plastic reels to the wire and cable industry for over 45 years, providing the most comprehensive product line of any reel manufacturer. Carris Reels also has subsidiaries producing furniture and pallets.
Carris Reels initiated an employee stock ownership plan (ESOP) in 1995 by contributing approximately 10% of its stock to the ESOP, and intends to become 100% employee owned and governed over a period of approximately 10 years. Owner Bill Carris is a strong believer in participation and community building. Bill Carris created a long term plan to move his company not only from family to employee ownership, but to transform its culture and employees to community stewards as well as profit making owners. Some of the first concrete steps in this process were the creation of the ESOP plan, and the employee participation committee, and involvement of the employees in designing that plan.
Assisted by Attorney Deborah Olson, Carris Reels used a several stage education and decision making process with a four-fold purpose:
The outcome was that:
Unprofitable subsidiaries are often offered for sale to employees. Employees should approach such opportunities with care and predicate their actions on feasibility studies conducted by skilled consultants who know when to say no to a bad idea. The feasibility and success of the Franklin Forge worker buyout depended on a number of factors including strength and skill of both the workers and management, the community's need for ht plant, the fact that the workers initiated the buyout, and the parent corporations' motivation to sell at a low price and make the deal work.
Located in West Branch, Michigan, Franklin Forge was a subsidiary of Capitol Manufacturing, a company in the oil field equipment business. Franklin was and continues to be one of Capitol's suppliers. During most of the years it was owned by Capitol, Franklin lost money. These losses resulted mainly from Capitol's cost structure and lack of experience in the forging business. Yet because Capitol was quite profitable prior to 1982, Franklin's losses did not become important to Capitol until 1983 and 1984.
In early 1984, Franklin Forge employees sensed that the company's continuing losses threatened their future. The union, International United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) Local 1874, organized a jobs committee to explore how they could save their jobs. After investigating Franklin's financial condition, the employees determined that purchasing the company was the best way to protect themselves.
At the same time, Harsco Corporation, which owned Capitol Manufacturing, decided to sell Franklin due to the increasing significance of Franklin's losses. Harsco could not close Franklin without a buyer because it had a take-or-pay contract with the gas utility that ran a gas line to Franklin. Since the contract was in effect for at least another year, and no buyer seemed interested in the less than desirable West Branch manufacturing location, Harsco knew that the employees' offer was the best it would get.
The employee effort to buy Franklin began in earnest when UAW International Representative Jack Laskowski sought assistance from the Michigan Employee Ownership Center (MEOC). The employees subsequently formed a buyout association, retained Groban Olson and Associates as counsel, and commissioned a feasibility study. The employees recognized that they needed strong management to make Franklin profitable and asked the company's former manager to be the plant's new manager and chief executive officer. He had managed the plant for several years, was well-acquainted with the forging business, and was well-respected by local businesses and lenders.
Franklin's recent losses made it difficult to raise the money to finance the buyout. Union members made numerous calls to lenders and worked hard to raise funds from employees and various government bodies. The perseverance and positive attitude of the buyout association impressed the lenders. The National Bank of Detroit (NBD), for example, became involved in finding other lenders to join it in financing the deal.
In addition to raising money, the buyout association worked hard to educate themselves and the community on the concept of employee ownership. Aided by MEOC, the association developed its own employee ownership education program. As a part of this program, the Industrial Cooperative Association (ICA), MEOC, NBD, and the Michigan Department of Labor, led education sessions attended by those involved in the buyout and interested community members.
As a result of the buyout association's efforts, Franklin Forge became a worker cooperative. Each worker owns one voting membership share and a proportionate share of capital in the company's internal equity accounts. The workers were able to purchase their membership shares, which initially cost $5,000 with loans primarily from the Industrial Cooperative Association Revolving Loan Fund and the Farmers and Merchants Bank of Hale. These loans required down payments of $250 and payments of $1 per working hour for 3 years to settle the $4,750 balance. Other lenders whose help was essential to finance the buyout included the State of Michigan, Ogemaw County, the National Bank of Detroit, the seller, and Franklin's chief executive officer. In the fall of 1986, employees invested an additional $2,000 each to cover working capital costs caused by a rapid increase in business.
In 1984, when the employees first contemplated a buyout, Franklin employed 20 people and had 82 on a seniority list. At the time of the buyout, management projected that Franklin would employ 38 workers by the end of the first full year of operation. After six months of operation, Franklin already had 38 employees, and by the end of 12 months, it employed 54 people. By December of 1986, Franklin employed 68 people. The 1988 employment averaged 82. For the year of October 1988 through September 1989, the average employment is expected to be approximately 100.
The Employee Stock Ownership Plan (ESOP) at National Forge is a contract ESOP with a formula vote and not a traditional leveraged ESOP.
The National Forge ESOP will acquire its 63.5% interest in the company over a period of 5-7 years but the ESOP participants stock has a special formula vote giving participants 63.5% of the voting rights prior to their acquisition of that stock.
National Forge Company, located in Irvine, Pennsylvania, is a leading manufacturer of very large precision machined forging. More specifically, National Forge is an international market leader in the crankshaft, pipe mold, and defense markets. It was founded in 1915 by Clinton Wilder, and continued under the Wilder family ownership until June of 1995. In May of 1994, the Wilder family provided the National Forge employees with an opportunity to make a bid for the Company.
In June of 1995, 676 employees of National Forge Company purchased the 80 year old family-owned business utilizing an ESOP. Approximately 550 of them are represented by the Independent Union of National Forge Employees (IUNFE).
An employee buyout committee comprised of senior management, salaried employees, and representatives of the IUNFE led the transaction. The IUNFE retained Deborah Groban Olson as counsel to represent them in negotiations with the Wilder family, the lenders, and management.
A consortium of lenders led by Chemical Bank provided financing. Senior management provided initial cash equity via private placement. The seller also maintains a small continuing interest in the business.
The National Forge employees agreed to a 10% wage and benefit reduction in order to facilitate the buyout. These reductions will be offset with a substantial new profit- sharing plan, as well as the ESOP shares. The company's board of directors will include hourly employees and IUNFE representatives, as well as senior management and outside directors, chosen jointly by labor and management.
The successful purchase of National Forge Company by its own employees has allowed the Wilder family to retire from management of the company while still retaining a small interest, has kept the jobs and wealth generated by National Forge in the Irvine community, and has given the National Forge employees a voice and financial interest in the continued growth and prosperity of National Forge. It has also created a new voice for all employees and the IUNFE in making corporate decisions.
In 1987, the 535 employees of Chase Brass, the sheet metal division of BP America, Inc., were about to lose their jobs to a plant closing. The division makes copper and brass sheets used largely for auto and electrical manufacturing. BP America indicated an openness to a deal with division employees, and on Jan. 29, 1988, the workers began to experience life as owners of the newly renamed North Coast Brass & Copper Co.
Labor unions representing workers in the plant have four seats on the nine-member board of directors, management has two seats, and labor and management jointly select three outsiders to the board. At the time, Attorney Deborah Groban Olson, who assisted the employees with the buyout, indicated that North Coast probably had more immediate employee and union control in its governance structure than any other employee buyout of its size.
The purchase price for North Coast was significantly lower than the liquidation value. The workers financed the deal with $30 million from AmeriTrust - $22 million in revolving credit and an $8 million employee stock option term loan.LTV Steel Corporation's divestiture of its profitable subsidiary, Republic Container, presented Republic Container's employees with an ideal opportunity to buy the company and prevent job loss. Mike Cable, President of the United Steelworkers of America ("USWA") Local 5712, recognized this opportunity and aggressively led a worker buyout effort. As a result, the employees out-bid and out-maneuvered competitors who sought to buy the business. Situated in Nitro, West Virginia, Republic Container is and has been a producer of fifty-five gallon drums used largely by the chemical industry.
In 1985, LTV Steel decided to sell all the companies in its manufacturing division. Many of these companies, including Republic Container, were profitable and had been captive markets for LTV's steel. Unlike many companies acquired by their employees, Republic Container was not threatened with bankruptcy. During its twenty-seven years of operation, Republic Container turned a regular profit making steel barrels for Union Carbide, Dupont, Monsanto, and other customers.
After learning that LTV Steel was seeking a buyer for Republic Container, the local president of the USWA sought information on the sale and competing offers, made the union's interest in the sale known, and organized the employees to form a buyout association. All Republic Container employees, including nonunion workers and the plant's general manager, became members of the buyout association. The State of West Virginia granted $30,000 to the buyout association for consultants to study the feasibility of the employee buyout plan. When the consultants advised that the buyout could succeed, the association then obtained a $61,000 grant from Kanawha County to pay the lawyers, business consultants, and appraisers needed to implement the buyout. The association retained Groban Olson & Associates as counsel and Chuck Jacobs, as business consultant, to represent them in negotiations with LTV Steel and the lenders and help structure the deal. Groban Olson also assisted the union and employees establish the buyout association as an entity which involved all employees in decisions about the structure of the ESOP, the new corporation, and the revisions in their compensation package.
In September, 1985, sixty-six Republic Container employees purchased the company from LTV Steel. The purchase was accomplished through the use of an employee stock ownership plan which holds all the stock of the company in a trust for the employees. Stock gives the employees two benefits: voting rights and financial rights. Employees are entitled to vote in the election of the company's board of directors and on other matters resolved through voting. When employees retire, they are paid the value of their shares.
Republic Container's ESOP gives each employee one vote. By creating two classes of stock, voting and nonvoting, only one share of voting stock, with a value set at $1 per share, is allocated to each employee. 3,000 shares of nonvoting stock, with an initial 1985 appraised value of about $475.00 per share, which increased to $575.00 in 1986, to $626.00 in 1987 and to $835.28 per share in 1988 and $1,225 per share in 1992, are gradually being allocated to the employees' ESOP accounts over seven years. The amount of nonvoting stock an employee receives is based on annual wages not exceeding $22,500 per year. The value of an employee's ESOP stock, however, depends on the fortunes of the company. If Republic Container prospers, the value of the stock is likely to increase. If the company falters, retiring employees may find that the shares in their account are worth less than they had anticipated. At the end of 1992, the typical employee's vested ESOP account is estimated to be worth approximately $72,000.00.
Republic Container employees did not have to make any out-of-pocket payments as part of the purchase or put up personal property as collateral for the loans used to purchase the company. Republic Container was sold for $1,424,000, an amount raised by two loans: $924,000 from the National Bank of Commerce and $500,000 from the West Virginia Economic Development Authority. The Bank of Nitro lent the new company an additional $600,000 for working capital. The loans are being repaid out of company profits over seven years.
As part of the buyout, employees agreed to take a one-year wage adjustment of $1.25 per hour. Union wages after the cut ranged from $9.20 to $11.60 per hour. Wages rose, under the union contract, an average of 42.5 cents per hour each year over four years after the buyout.
In January, 1986, Republic Container employees elected their first board of directors. The board has final authority to operate Republic Container and to hire and fire management employees. Due to a compromise reached prior to closing the buyout sale, voting and nonvoting directorships were alloted to certain groups. Among the five voting directors, one represents the lenders, one represents management, and one is a member of the USWA. The only restriction on the other two voting directors is that they cannot be employees of Republic Container. The one nonvoting director must be a member of the USWA.
During its first four months of operation after the buyout, Republic Container cleared a $78,000 profit, higher than that originally projected, and it has been profitable ever since.
In sum, the purchase of Republic Container by its own employees demonstrates that organized and knowledgeable employees can successfully purchase a profitable company and increase its profitability while giving employees a strong voice concerning its future direction.
The Unions (represented by Groban Olson and management at Rosauers, a regional grocery chain headquartered in Spokane, Washington, have entered into an ESOP buyout to save jobs. They have developed some interesting procedures to ensure proper protection and representation of unionized employees interests in an employee owned company where high level management employees own a portion of the company outside the ESOP. The ESOP trust is designed as a Taft-Hartley Trust with labor and management exercising block votes and the provision for a neutral third party to solve potential disputes within the ESOP Committee. They have designated a number of shareholder and board of director issues as supermajority issues. They have also provided for a termination of their wage set-aside agreement in the event of any foreclosure, liquidation or sale of the company without union approval.
In an effort to improve competitiveness and save jobs the United Food & Commercial Workers (UFCW), Bakery Workers and Teamsters have joined in a cooperative effort with management to buy the chain in order to implement a change in marketing strategy. This involved a sliding scale sacrifice in pay affecting all but the lowest paid employees and an end to the management pension plan. Certain high level management employees made cash investments in stock outside the ESOP, while all unionized employees over age 21 are eligible to participate in the ESOP. Although this ESOP allocates stock based on pay and most employees are eligible, approximately 55-60% of the stock will be owned by unionized employees when the initial acquisition loan is paid off. Thus the Taft-Hartley ESOP, supermajority provisions and termination of wage set-aside provisions were made to protect the stock rights gained in exchange for sacrifices.