New video of webinar "How a Co-op ESOP Hybrid Works"

How a Co-op ESOP Hybrid Works – If you missed this Feb. 21 webinar, you can now watch the recording here:https://vimeo.com/319063049You can also get the session materials, slides, and more here.Democratic ESOPs or ESOPs with co-op features has been a specialty of Deb Olson’s law practice for 38 years. Once Again Nut Butter Collective (OANB) is the featured example company in this webinar. OANB’s CEO, Bob Gelser, a worker board member, Scott Owens, and Deb, who is board chair of OANB will present on the two and ½ years of work that has led to the OANB participatory decision making system, and the history leading to it. Deb spoke about legal mechanisms and issues. Bob and Scott talked about the practical issues of making a participatory workplace of 80 people function efficiently. Chris Cooper of the Ohio Employee Ownership Center (OEOC) moderated.This event was cosponsored by the Groban Olson Law Firm, the Center for Community Based Enterprise (C2BE), the Ohio Employee Ownership Center at Kent State University (with support from the USDA's Rural Cooperative Development Program); Horizon Trust & Investment Management; and Once Again Nut Butter Collective, Inc.

North Coast Brass and Copper Co.

Extensive Employee ControlIn 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 made 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. After about 5 years, the company was purchased by foreign owners from the employees.

United Food and Commercial Workers (UFCW)

UFCW negotiated an ESOP with a significant union role in corporate governance and representation agreement for new stores. Since

2011 this 100% employee- owned chain of 76 grocery stores, with over 15,000 employees,  has already expanded to 80 unionized stores.

In 2011 Homeland Acquisition Corp. (HAC), a grocery store chain in Oklahoma and Texas, and United Food and Commercial Workers (UFCW)Local 1000, partnered to transition the company to 100% employee ownership using an Employee Stock Ownership Plan (ESOP). As part of the transition, HAC and UFCW negotiated a new contract and the terms of the ESOP, as well as a number of corporate governance provisions for the new company. When the deal closed at the end of 2011 there were 76 stores. Now there are 80 stores, all of them union.

Aided in negotiations by several financial and legal advisors, including Attorney Deborah Groban Olson, UFCW and HAC agreed on:

1. A new defined benefit plan
2. ESOP participation for union members
3. A significant role for the union on the board of directors
4. A representation agreement covering new stores opened by the company.

According to UFCW Local 1000 President Ricky Burris:

“UFCW members are excited to own a majority of HAC stock and are eager to work with management to achieve continued success for the company. We take seriously the responsibilities that come with ownership, representation on the board of directors, and a voice in major corporate decisions.”

For another example of Deborah Olson's ESOP work with the UFCW see the Rosauers case study.

Paper Mill

Paper Mill Employee Ownership Negotiations for PACE International UnionIn the late 1980’s and early 1990’s there was a major contraction in the US paper manufacturing capacity. Attorney Olson provided assistance and advice to PACE International Union concerning potential employee buyouts of Eastern Fine Papers, Shasta Paper, Cornell Globe,  Sebewaing; I.P. Natchez, Ms., and Passadumkeag Sawmill. Paper mills proved to be too capital intensive to enable successful employee buyouts. However, in a number of cases, the active participation of the union in the purchase process, enabled the union to have some influence on getting a more favorable company as the successful buyer, and thus getting better union contracts than they would have from other buyers.

Homeland Grocery

United Food and Commercial Workers (UFCW) negotiated an ESOP (Employee Stock Option Plan) with union corporate governance role and representation for new stores.

UFCW negotiated an ESOP with a significant union role in corporate governance and representation agreement for new stores. Since 2011 this 100% employee-owned chain of 76 grocery stores, employing over 15,000 people, has already expanded to 80 unionized stores.

In 2011 Homeland Acquisition Corp. (HAC), a grocery store chain in Oklahoma and Texas, and United Food and Commercial Workers (UFCW) Local 1000, partnered to transition the company to 100% employee ownership using an Employee Stock Ownership Plan (ESOP). As part of the transition, HAC and UFCW negotiated a new contract and the terms of the ESOP, as well as a number of corporate governance provisions for the new company. When the deal closed at the end of 2011 there were 76 stores. Now there are 80 stores, all of them union.

Aided in negotiations by several financial and legal advisors, including Attorney Deborah Groban Olson, UFCW and HAC agreed on:

1. A new defined benefit plan;
2. ESOP participation for union members;
3. A significant role for the union on the board of directors;
4. A representation agreement covering new stores opened by the company.

According to UFCW Local 1000 President Ricky Burris:

“UFCW members are excited to own a majority of HAC stock and are eager to work with management to achieve continued success for the company. We take seriously the responsibilities that come with ownership, representation on the board of directors, and a voice in major corporate decisions.”

Fulton Tool and Die Co.

Example of Sub S ESOP Benefits

Complete buyout of a C corporation shareholder, followed by a corporate S election.

Mr. Fulton owns 100% of the shares of Tool & Die, Inc., a Sub Chapter C company worth $6 million. Mr. Fulton is getting older and would like to sell his company and enjoy the proceeds. If he sells to an outside buyer, he will pay taxes, perhaps at the 20% rate, on his net long-term capital gain. If his original basis in the stock was -0-, he would pay $1,200,000 and keep $4,800,000 after taxes.

If the company, instead of an outsider, buys him out by borrowing money or using cash reserves, Mr. Fulton faces the same tax sting. In addition, the payments will not be deductible to the company and might impoverish it (perhaps making it impossible for the company to complete a gradual buyout).

These problems can be avoided if Mr. Fulton creates a company ESOP. The ESOP finances the purchase with company contributions, or by borrowing from a lender through the ESOP. The company typically would guarantee the loan. The purchase price of the stock is set by an independent appraisal. If Mr. Fulton initially sells at least 30% of outstanding company stock to the ESOP, he can “rollover” the proceeds of the sale into stock or bonds in U.S. companies and avoid paying any tax on the proceeds unless and until he sells that “replacement” stock. Any replacement stock that remains in his estate until his death may get a stepped-up basis (depending on applicable estate tax laws in the year of death). Where the stepped up basis applies, the capital gain is never taxed.

The company deducts the full amount of contributions to the ESOP used to buy Mr. Fulton’s stock, or to make interest and principal payments, within limits, on a loan used to buy Mr. Fulton’s stock. If the company is taxed at a corporate rate of 36%, this deduction would mean that $2,160,000 (36% of $6 million) of the cost of cashing out Mr. Fulton would be paid out of company funds that otherwise would have been used to pay taxes.

The stock is held in trust for employees. When they retire or leave the company they are paid their vested and allocated stock or the cash value of that stock, usually in installment payments over five years (or longer if the company stock was purchased with borrowed funds).

There are several permissible vesting schedules so that employees who leave with less than five years of service need not get any stock upon termination.

The net result is:

• Mr. Fulton defers (and perhaps avoids) $1,200,000 in taxes on his capital gains. If he wishes, he can retain control over his company while he gradually sells to an ESOP over many years.
• The company saves more than $2.1 million by deducting the $6 million in ESOP contributions used to buy stock. This savings over the years should strengthen the value of company stock as the buyout proceeds, and enhance the ability of the company to raise the cash needed to purchase the owner’s stock.
• The employees become beneficiaries of a trust that holds stock in their company. They each have an individual stock account in that trust.
• If the Company then makes an S election after all Mr. Fulton’s stock has been sold to the ESOP, the Company will not pay income taxes on its retained earnings as they accrue in the ESOP. Rather it will make distributions from the ESOP to participants upon their termination of employment, at which time the employees will owe taxes on the value of the ESOP stock.

MBC Ventures, Inc.- Full Case Study

MBC Ventures, Inc. (formerly “Maryland Brush Company”)
A 100% employee owned old industrial company develops new green tech product with money saved as an S corporation ESOP.Maryland Brush Company, Inc. (MBC) located in inner city Baltimore, is now a one-vote-per-person, unionized, 100% employee-owned company.After Pittsburgh Plate & Glass divested Maryland Brush Company, Inc. (MBC) in 1990, management and the United Steelworkers members bought the company through an ESOP.Through the continuing assistance of Attorney Deborah Groban Olson, corporate, and ESOP counsel since 1998, MBC has been able to establish and maintain its place as a worldwide manufacturing leader as well as a desirable, democratic, workplace. MBC is a full-service manufacturer of industrial brushes and paint brushes. The employees have one vote per person on shareholder issues, as in a co-op, and regularly participate in making company decisions.As an ESOP, MBC is uniquely positioned to compete in the global economy, establishing the company as one of the most progressive employers in the industry, the majority of whom do not offer similar programs.In 2000, the tenth year of the ESOP, MBC had experienced increased sales for the five preceding years and its stock value had increased by 133% since becoming an ESOP. From inception of the ESOP in 1990 through 2008, the company’s stock has consistently met or exceeded the earnings charted by the S&P, completely turning around MBC’s financial picture and its prospects going forward.In 2007, after paying off its stock acquisition debt, MBC elected Subchapter S status. As a 100% ESOP owned company, it was thereafter exempt from paying federal corporate income tax. These savings have enabled it to invest over $1,000,000 in the purchase and product development of its new Skylouver™ product.Since 2008, the maturing market for industrial brushes caused MBC to seek new product lines.In 2010, MBC invested in a start-up company making the SkyLouver™ technology (a combination skylight and solar thermal power collector) in exchange for manufacturing rights.MBC later decided to buy all the intellectual property rights to SkyLouver ™ to ensure successful management of the commercialization process.The new SkyLouver™ product line, launched in 2013, is expected to increase employment, employee ownership and profits. MBC will have shifted its product focus from a mature shrinking market to a dynamic growing one.In September 2010, the US Department of Energy in conjunction with the State of Maryland’s Clean Energy Economic Development Initiative (CEEDI) grant program, provided $770,000 to MBC to retool a production line at its Baltimore facility to manufacture SkyLouver™ products.MBC estimates that this project will result in 10 jobs in Baltimore during the first year. MBC has gone first to the Steelworkers to make the initial manufacturing worker hires for SkyLouver™. To accommodate its new product and market expansion, the company’s name is now MBC Ventures, Inc. 

Carris Reels, Inc.: Full Case Study

Carris Reels, Inc.
Business Succession Major Decrease in Employee Turnover,
Employee Participation in ESOP Plan Design & Community StewardshipCarris Reels, Inc. is a family owned company with 710 employees in 15 plants in eight states and sales estimated at $83 million in 1995. Henry Carris started the Company in 1951, 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 has 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.Carris Reels CFO, David Fitzgerald said “Before the ESOP, we had 100% employee turnover in our Michigan and North Carolina facilities. Now that the ESOP owns the company, turnover is 20% company-wide. Although many of our jobs are physically demanding, our company has become an employer of choice.”Assisted by Attorney Deborah Olson, Carris Reels used a several stage education and decision making process with a four-fold purpose:

1. initiating the employee participation system;
2. integrating it into the company’s long term plan for ownership and culture change;
3. educating the initial employee leaders in the nuts and bolts of the ESOP; and
4. making all the major plan structuring decisions.

The outcomes were that:

1. a few major issues were reserved by the seller as his prerogative;
2. most structure decisions were made by the Long Term Plan Steering (LTP) Committee, comprised of employees from each location and all levels of the Company;
3. the allocation structure was put up for a vote of all employees;
4. upper management learned about several serious roadblocks in the participation system from hourly and middle management employees and took action to unblock them;
5. the LTP Steering Committee became the primary group responsible for championing the participation system and received the permanent job of, among other things, choosing the ESOP Administrative Committee, which serves as the Trustee.

Description of Carris Reels Employee Ownership from its Website"Carris Reels is a company of employee-owners. One hundred percent of the company’s stock is held in an ESOP plan, which is a defined contribution retirement plan and thus a long term benefit. Carris Reels has taken employee-ownership way beyond the minimum requirements and developed a culture in which broad based employee-ownership is assumed to be normal rather than extraordinary.Shared ownership is different than owning something individually and requires a unique balance of cooperation, understanding and accountability. At Carris Reels, all employee-owners have a stake in the outcome of every transaction and business decision. Equitable play and above average benefits are part of the equation, as are monthly incentives and annual profit sharing bonuses. Each year the stock value provides a measure of our long term success. We make sure employee-owners understand that thoroughly satisfied customers and operational excellence are absolutely necessary for employee ownership to realize its full potential.Internally we refer to Carris Reels as "employee-owned and governed." We have implemented a system for involving employee-owners throughout the company in decision making. Whenever possible we push for decision making to be done by those who will be impacted by a decision. Employee owners have many opportunities to serve on special purpose committees. The company's primary governing body is the corporate steering committee (CSC) which is made up of management and non-management employee-owners who work on a very wide range of issues. The CSC is primarily responsible for communications and culture at Carris Reels, and makes decisions about governance, policies and benefits. The CSC also serves management and the Board in an advisory capacity. At Carris Reels, non-management employees also serve as ESOP Trustees, and the CSC is now working on making recommendations to the Board of Directors for non-management employees to serve on the Board. Carris Reels truly is employee-governed!At Carris Reels, we recognize that there is a spiritual component to the organization. We also realize there is an emotional element. Carris Reels employees were hardworking and dedicated long before the company became employee-owned. We talked a lot about the importance of "looking out for each other" when we dramatically improved our safety performance, and the Golden Rule serves as our code of conduct. Folks at Carris Reels work extremely hard. We "ride for the brand" and wear the company hats and t-shirts. Many long term employees will tell you they have stayed at Carris Reels so long because they "belong here".The ESOP is the vehicle for employee ownership at Carris Reels. Continuing this analogy into the future, we are never completely "done." We have had a long standing commitment to open book management and teaching employee-owners the business but yearn to make "the books" an integral part of our day to day operations. Employees are owners, and are as committed as they can be, however we expect to much more fully develop the entrepreneurial spirits within our employee-owners.Carris Reels is proud to be one of many companies that exemplify employee-ownership in America. We have actively participated in this movement by becoming active members of The ESOP Association and its Chapters. We were honored when The ESOP Association named Carris Reels Employee Owned Company of the Year and we are proud of the Awards for Communications Excellence (ACE) we have received. Carris Reels employees are frequent attendees, participants and speakers at The ESOP Association's meetings and conferences. One of the most valuable membership benefits is developing relationships with other leading ESOP companies and bringing back what we learn from these trendsetting organizations to our company. A recent issue of the ESOP Report used the tagline "Where the ESOP Community Meets" to promote the Annual Conference. That phrase really sums it up well!The ESOP Association's vision statement says: "We believe that employee ownership improves American competitiveness¦ that it increases productivity through greater employee participation in the workplace that it strengthens our free enterprise economy and that it will maximize human potential by enhancing the self-worth, dignity, and well-being of our people. Therefore, we envision an America where employee ownership is widely recognized as a catalyst for economic prosperity where the great majority of employees own stock in the companies where they work and where employee ownership enables employees to share in the wealth they help create." In addition to our membership in The ESOP Association, we are also members of The National Center for Employee Ownership (NCEO) and ESCA. We have contributed to The Employee Ownership Foundation (EOF) and support the Vermont Employee Ownership Center (VEOC).Realizing how much we benefit from employee-ownership at Carris Reels, and how much we have gained from our interaction with other employee-owned companies we strive to give back to the ESOP community and help other companies become employee-owned as well."