UNIVERSITY OF WISCONSIN SCHOOL FOR WORKERS

NEGOTIATING, CREATING & GOVERNING EMPLOYEE STOCK OWNERSHIP PLANS AND ESOP COMPANIES

December 10, 1991
by
Attorney Deborah Groban Olson

I. Uses and Abuses of Employee Ownership

A. Forms -: ESOP, Coop, Stock Option Plan, Traditional, Corporation, Sub-S Corporation
B. Uses - Employee Benefit Flexible Compensation Method Cash Out Shareholders Save Jobs Create Employee Equity Stake Obtain Employee Control Over Investment Decisions Mechanism for Corporate Raids and Defense Against Them
C. Abuses - Mechanism for Corporate Raids and Defense Against Them Overleveraging Companies Requiring Closing of Facilities to Service Debt Using ESOP to Avoid Union Organization
D. The Need for Labor Strategies on Employee Ownership

Employee ownership is growing rapidly while the labor movement is shrinking, manufacturing jobs are being lost to foreign competition, and flexible compensation systems are being forced on labor. It is clearly a force to be reckoned with.

The Key Questions Are:

How can unions use employee ownership to benefit their members job security, compensation, or dignity and usefulness in the workplace?
How can unions use employee ownership to help build the solidarity of the union and protect the domestic manufacturing base?
What do you need to know to get the most out of an employee ownership package?
What tools do union representatives need to make maximum use of employee ownership once obtained?

In this session, I hope to touch on all these issues and provide the beginnings of answers to some of these questions. This is a complex field. Labor needs to develop an ongoing strategy and coordinated programs and services in this area to retain membership and gain organizing potential. I believe the new AFL-CIO Committee and some of its affiliates are beginning to do so. However, time is very much of the essence. Much of the money once available for this type of project is now much harder to find.

II. Key Design Features To Consider In Negotiating Employee Ownership

A. Control
B. Allocation of Stock and Risk
C. Distribution
D. Stock Valuation and Cost To Workers
E. Participation Programs
F. Retirement Security and Cautions
G. Conflicts of Interest

III. Capital Strategies For Labor: Uses Of ESOPs and Cooperatives

A. Proactive - When to Consider Proposing An ESOP or Coop 1st Right of Refusal - Protection Divesting Subsidiary - Profitable or Not Company on Sale - Where Union or Workers Fear Buyers Undervalued Company Good Product, Market, Incompetent Management Fight Industry Attack On Union Standards Good Local Management, Bad Corporate Management As Quid Pro Quo Where Concessions are Unavoidable Fight Union Busters As an Organizing Tool - Using ESOPs as a Means of: Obtaining Increased Benefits for Unionized Workers Organizing the Unorganized By Creating Examples of Good ESOP Companies Promoting Legal Rights of ESOP Participants to Give Leverage for Organizing and/or Litigation
B. Reactive Plant Closing Response Corporate Takeover or Defense Organizing a Union at a Company Where Employees are in an ESOP ERISA Rights are Often Violated by Employers as Well as Some IRS Plan Qualification Requirements Raise ERISA Rights Issues in Campaign Litigate ERISA Rights Issues Raising IRS Qualification Issues is a Double-Edged Sword ESOPs may Legally Exclude Collective Bargaining Employees Where the Employer has Negotiated Pension Issues With the Union Automatic ESOP Exclusion Upon Union Organization may be Actionable at the NLRB or under ERISA Negotiation of Inclusion in the ESOP is No Different Than Negotiation of Wages, Pension, etc. - the Plan's Exclusion of Collective Bargaining Employees Could be Changed Based on negotiations The Company has the Right to Refuse to Agree to Include Collective Bargaining Employees in its Plan
C. Restructuring - Negotiating over existing ESOPs Erisa Leverage (fiduciaries, banks, etc.) Tax Leverage

IV. Governance: The Design of Corporate Administration for a Worker Owned Enterprise

A. Key Factors to Consider in Design and Negotiation of Corporate Governance Structures in Employee Owned Companies Elements of a Successful Company Elements of a Successful Union-Company Relationship Factors Added by Employee Ownership Optimal Governance Structure Balances These Elements Informed Leadership, Choice of Consultants and Timing

B. Control Documents Negotiation Know and Review All the Documents Which May Have Control Features: Corporate Articles of Incorporation Corporate Bylaws ESOP Plan ESOP Trust Loan Covenants Management Contracts Collective Bargaining Agreements Major Supplier or Customer Contracts Employee Ownership Does Not Necessarily Provide Employees or the Union with Control Determine Minimum Level of Control Needed for Survival and Protection of Union and Members; and Maximum Level of Control Desirable for Union, Members, Management, Outsiders, etc. Too much control by any one party may lead to corporate decisions being made for one party's political or economic benefit instead of in the long range economic best interests of the company and its employees. Problems of too little or too much control by a Union

C. Parties Who Shape Corporate Governance Relation to External World Lenders Customers Suppliers Consultants Relation of Internal Parties Equity Partners Union Management ESOP Administrative Committee Employee Participation Program Keeping the Union Membership Involved in and Loyal to the Union Organizing and Leading the Employee Ownership Participation, Communication and Involvement at Diverse Work Sites Providing Employee Ownership and Board Member Training

D. Levels of Governance Corporate Board of Directors Corporate Board Executive Committee CEO and Management Chain of Command ESOP Administrative Committee or Trustees Joint Labor-Management QWL Participation System at Department or Shop Floor Union ESOP Participant Input System to Board or ESOP Committee Decision Making

E. Types of Decision Making Authority and Influence -

A combination of different levels of authority by various parties on different issues helps balance power and gives certain parties authority to act quickly when necessary, incentive to negotiate when necessary, and escape routes from untenable positions.

Unilateral Authority
- Management's right to hire and fire, direct work and spend money up to some limits
- Union's strict enforcement of CBA rules
- Lenders right to take over some functions or foreclose if loan covenants are breached
- Union contract concessions end if negative loan covenants kick in, etc.
Advice and Consent - Veto Power and Right to Consultation Such as Use of Supermajority Provisions (for board or membership votes) to keep the management from undercutting the institutional authority of the Union or job security of the workers
- Union consent needed to amend articles, bylaws, ESOP plan, trust, etc. for decisions on mergers, acquisitions, sales of significant assets, addition of board seats, etc.
Information Without Veto or Approval
- Disclosure of monthly or quarterly financials
- Production, Sales, Quality, etc. information to aid employee owners judge their own and management's performance

F. How Much Control Does A Union Really Want Over a Company? Practical & Political Issues to Balance Protecting the Union's Role, Status and Authority Preserving Job Security Letting Management Manage Getting Rid of Dead Wood Keeping Up With the Competition Protecting Industry Standards Legal Issues Union Domination of Employer Is an ESOP a Taft-Hartley trust? Can and should it operate like one? Refusal of Competitors to Bargain with Union - Bausch & Lomb Corporate and ERISA Fiduciary Duties and Potential Conflicts with Union Role

G. General Cautions Ownership and Control Do Not Always Go Together Financial Structure Dictates Legal Structure Determine Financial Feasibility Know Your Legal Structure Priorities Before You Negotiate the Finances Timing, Planning, Education and Leadership are Keys To Success

H. Precautions and Suggested Areas of Training and Action for Union Representatives on Boards of Directors and ESOP Committees: know their fiduciary duties and responsibilities to participants; be informed and seek language to protect the Board members rights to protect employees as well as to protect shareholders; be well enough informed to hold their own with outside directors (more training programs such as NEOEOC Worker/Director Board Training are needed); not accept annual revolving door board seats for workers on boards, especially where others on board have longer terms; have on board of directors at least one worker representative on the Board who is not beholden to the Company management for his/her job, such as someone appointed by the International Union, district, or amalgamated local leadership; find mechanisms to avoid potential conflicts during collective bargaining with the employer and with its competitors; actively encourage and participate in employee workplace decision making systems in which the union has a clearly defined leadership role and in which members have an opportunity to make serious contributions. This may be in addition to, or in place of, a labor-management participation system.

V. Pending ESOP Legislation on ESOPs

A. HR.2410 allow Sub-S Corporations to have ESOPs; restore the ESOP exception to the 10% early withdrawal penalty; allow double contributions for ESOP participants earning less than $30,000 per year; restore the law allowing the ESOP to assume an estate's tax liability under certain circumstances; clarify the legal standing of ESOP and 401(k) arrangements; and permit employees more time to acquire their public company if foreign interests try to take it over. How Many of These are Really Pro-employee?
B. What Else is Needed for Pro-employee or Pro- union ESOP Legislation? One Vote Per Person Not Permitted Under Current 50% Bank Exclusion Law See Proposals in ESOPs For Workers, Not For Wall Street

VI. Conclusions

A. Employee ownership is increasingly important as a strategy to anchor productive capital assets in our communities in unionized shops.

B. Employee ownership has potential as an organizing tool.

C. Early pro-active Union and Union consultant leadership in the structuring of the financing and control documents is crucial to getting a valuable result.

D. ESOP legislation protecting employee rights is important for organizing and to protect gains made.

E. Determining the proper role for Union members on corporate boards of directors and ESOP Committees, and educating Union members to properly serve in these roles is crucial to maintenance of employee ownership rights.

F. Creation of participation systems that make the company more efficient, while retaining a meaningful role for the Union, are important for both the Company and the Union to maximize the value of employee ownership.

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