Frida, Inc. - Full Case Study

Frida, Inc.
business succession of substantial social enterprise using a worker co-opFrida Inc. is a real client for whom Atty. Olson is working, for which the company name may not yet be revealed. This company is owned by two partners, now in their 60’s, who have built up a very successful business over 30 years. They have several hundred employees. They run a highly participative workplace and the company is well known for its high standards for quality, customer service, and community involvement and charitable support. Over the years the owners have helped many of their employees create businesses that collaborate, but are not franchises, because they provide different products and services that are used by all the businesses.These businesses have had a highly organized consensual joint decision-making structure which is not a legal entity. Now that the partners are considering retirement, they are seeking a way to provide broad ownership for all of their employees who are willing to make a small investment, but need to include other investors in order to get their money out of the business.Like many other successful social entrepreneurs, these partners want to:

• get their investment out of the businesses, at least for their estates
• ensure that the businesses continue to operate in their hometown
• maintain their financial success, quality, customer and worker friendly atmosphere
• enable all interested workers to buy into the company, and
• maintain the company’s role as a model corporate citizen.

Having carefully reviewed the options, they have determined that an ESOP is not for them and a worker co-op to own a portion of the business is the way to go forward for these reasons:

• They want the employees to have “skin in the game” by making a modest investment (which can be done by payroll deduction). But they do not want to give away ownership simply as an employee benefit to everyone. Under state securities laws, there is a simple exemption for such investments in a co-op, and no such exemption for hundreds of “unsophisticated investor” employees to make such investments without prohibitive securities costs.
•  They want the company to stay true to its local origins and social values. A key difference between ownership by an ESOP and co-op ownership is the ultimate ability to keep the company independent. In an ESOP the workers are beneficiaries of an ERISA pension plan (covered by federal tax and pension law) that is controlled by a trustee (who may be appointed or elected). The Trustee’s duty is to the beneficiaries as retirees, who may be legally forced to sell the business if s/he gets a good enough offer or face expensive litigation for breach of fiduciary duty. Co-op members are actual equity owners of their co-op interests. They have the final decision on any possible sale which usually requires a supermajority vote.
• They want one vote per person and allocations based on work, rather than investment. This can be accomplished in either a co-op or ESOP.
• They want responsibility for carrying on the business and social values of the business to be controlled by current employees who been have and will be trained in their participative system. This can be done to some extent by an ESOP, although a co-op is a stronger mechanism. A co-op, which is intended to operate for the mutual benefit of its members, can have requirements that the business remain in its hometown and serve social purposes. However, any worker control mechanism that involves voting of stock must be done through the trustee, who is subject to ERISA fiduciary obligations. These obligations are focused on the needs of the employees as retirees, and not in their role as employee owners.
• They also want non-voting equity investors whose stock will appreciate in value. This is being accomplished by the co-op being a member of an LLC, where the preferred non-voting stock can appreciate in value. However, all the voting stock is owned by the co-op.

National Forge: Full Case Study

National Forge Company
Contract ESOP with Formula Vote for Union
Ended by premature sale of management sharesThe Employee Stock Ownership Plan (ESOP) at National Forge was a contract ESOP with a formula vote and not a traditional leveraged ESOP.The National Forge ESOP acquired its 63.5% interest in the company over a period of 5-7 years but the ESOP participants stock had 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, was a leading manufacturer of very large precision machined forging, and a market leader in the crankshaft, pipe mold, and defense markets. Founded in 1915 by Clinton Wilder, it 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 were offset with a new profit-sharing plan plus the ESOP shares. The company’s board of directors included 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 allowed the Wilder family to retire from management of the company, obtaining a tax deferral on the capital gains, while still retaining a small interest, kept the jobs and wealth generated by National Forge in the Irvine community for a few years, and gave the National Forge employees a voice and financial interest in the continued growth and prosperity of National Forge. It created a new voice for all employees and the IUNFE in making corporate decisions.However, when the management had the company buy back all their stock upon converting to an S corporation, the cash flow strain led to bankruptcy for National Forge. National Forge was reopened in Irvine, PA in 2005 after its assets were purchased out of bankruptcy by the Ellwood Group in 2003.

Rosauers Supermarkets, Inc.: Full Case Study

Rosauers Supermarkets, Inc.
ESOP Organized As a Taft-Hartley TrustIn July 1990 several unions and management at Rosauers Supermarkets, a regional grocery chain of 15 stores headquartered in Spokane, Washington, entered into an ESOP buyout to save 1,250 jobs. The union buyout team was led by Sean Harrigan, then president of the UFCW local union. They 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 designated a number of shareholder and board of director issues as supermajority issues. They 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 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 were eligible to participate in the ESOP. Although this ESOP allocated stock based on pay and most employees were eligible, unionized employeesl owned approximately 55-60% of the stock when the initial acquisition loan was 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.In June of 2000, the approximately 2,100 employees, by unanimous vote, re-sold the company to URM stores. 

Republic Container: Full Case Study

Republic Container
Use of Employee Buyout Association to Buy
Profitable Subsidiary
Restructured as Democratic/ Co-op Style ESOPLTV 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 was 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. Atty. Deborah 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 gave the employees two benefits: voting rights and financial rights. Employees were entitled to vote in the election of the company's board of directors and on other matters resolved through voting. When employees retired, they were paid the value of their shares.Republic Container's ESOP gave 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, was 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, were gradually  allocated to the employees' ESOP accounts over seven years. The amount of nonvoting stock an employee received was 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 was 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 allotted 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 demonstrated 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.After preserving good jobs in West Virginia for 15 years beyond the time that LTV sought to liquidate it, Republic Container was a casualty of the steel dumping crisis in the 1990s.

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Employee ownership builds community wealth, pride and self confidence.