Anchoring Businesses & Good Jobs with Employee Ownership

1. Anchoring Businesses & Good Jobs with Employee Ownership by Attorney Deborah Groban Olson and Robert Chiaravalli Michigan Labor Management Association Conference April 19, 2012, Kellogg Center Michigan State University

2. Key Concepts • Employee owned companies are subject to all the stresses of traditional companies • But, statistically, they are more successful at surviving and thriving as employers • Employee owners innovate rather than laying themselves off • There are successful unionized employee owned companies • Unions can play an important role in creating robust employee owned companies • ESOPs and c0-operatives are two forms of EO that work well in unionized companies • Inventors & their patents can also be used to anchor jobs

3. Which Company Stakeholders matter? Shareholders ? Employees ? Community ? Law and tradition only distribute profit & give voice to shareholders Majority employee owned companies usually protect the interests of all three –because they are intertwined What is a “successful” company? www.esoplaw.com

4. Capacity to evolve as market conditions change Sustainable Growth Increase in stock value Increase in employee compensation or benefits Job creation, or at least preservation Increased labor/management harmony or decrease in grievances Survival of the business with a union contract Increased employee participation in decision making leading to increased quality, productivity and profitability My definition of success www.esoplaw.com

5. Employee Owned Companies are 3 to 4 times less likely to lay off or lose workers From 2010 General Social Survey – table used with permission from National Center for Employee Ownership Employee Ownership Report p. 6 March-April 2012

6. David Erdal’s 1999 PhD Thesis at St. Andrews “The Psychology of Sharing” provides preliminary evidence (not conclusive proof) that those living in a community with a large percentage of worker cooperatives are healthier, better educated, have less crime and more social participation than people in a comparable Italian town with fewer worker cooperatives. Worker ownership makes people healthier & happier, not just wealthier Caption: the graph shows the differences on the following measures: • Crime: victimisation (C1), policing (C2), confidence (C3), feeling of security (C4), domestic violence (C5) • Education: level attained (E1), age leaving school (E2), truancy (E3), expected truancy (E4), post-school training (E5), perceived importance of education (E6) • Health: physical health (H1), emotional health (H2) (also measured: mortality) • Social Environment: perceived gap between rich and poor (SE1), helpfulness of authorities (SE2), supportiveness of social networks (SE3) • Social Participation: membership of clubs (SP) (also measured: voting, blood donation) Attorney Deborah Groban Olson www.esoplaw.com

7. Participativeemployee ownership leads to successful job creation & retention Mondragon: 50 years from 0 to 100,000 jobs and assets of 38 billion euro Emilia Romagna – 8,000 worker coops = 7% of Italy’s population; 12% of exports, 30% of patents Maryland Brush – old, inner-city employee -owned company makes the leap to green economy product EBO – diversification through active employee ownership – from mining equipment to recycling equipment & medical devices – tripled business in 5 years

8. Ongoing support & co-op resource sharing leads to more successful start- ups • Well funded & staffed support centers provide ongoing assistance with accounting, legal, business plans • Much more support than our small business development centers • Saiolan Start-up center at Mondragon University • Started in 1980’s • 89% of its start-ups are still in business 5 years later • 83% are still in business 10 years later • US system – 1 out of 5 start-ups is alive in 5 years • C2BE seeks to create support cooperative for start-ups

9. Ohio manufacturing job loss 2000-2008Ohio ESOP Survey – Kent State University 9 • 29% overall • 1% Employee Owned Network • Reasons: • Far less likely to outsource • Have avg. 2x higher rates of capital investment • More employee participation in making business decisions

10. Employee Ownership Trends From NCEO analysis of US DOL data -used with permission from National Center for Employee Ownership (NECO )Employee Ownership Report p. 7 March-April 2012

11. Extent of US Employee Ownership From 2010 General Social Survey - used with permission from National Center for Employee Ownership (NECO )Employee Ownership Report p. 6 March-April 2012

12. Increase in Employee Owners’ Stock % and Value 2006-2010 From 2010 General Social Survey - used with permission from National Center for Employee Ownership (NECO )Employee Ownership Report p. 6 March-April 2012

13. ESOPs appear to increase sales, employment, and sales/employee over what would have been anticipated, absent an ESOP. ESOP companies are also more likely to continue operating as independent companies over the course of several years. ESOP companies have sales growth 2.4% per year faster in the years following their ESOP than would been expected, based on the match-up against competitors in the pre-ESOP period. Employment increased 2.3% per year and sales per employee, 2.4%. Source: 2001 Study by Dr. Douglas L. Kruse and Dr. Joseph R. Blasi, School of Management and Labor Relations at Rutgers University The Power of Ownership Attorney Deborah Groban Olson www.esoplaw.com

14. Ongoing, successful, unionized employee owned company examples Homeland Grocery Stores – UFCW Maryland Brush Company – USW

15. UFCW & HAC Partnership to Increase Employee Owned & Unionized Stores • AWG bought stores in 2002 bankruptcy & turned them around • 2011 AWG created HAC to sell 100% ownership of s 76 stores + expansion stores to employees thru ESOP • Employer sought to terminate UFCW’s DB plan • UFCW negotiated: • New DB plan • ESOP participation for union members • Significant role for union on company board of directors • CBA covering any new stores opened by the company

16. Maryland Brush Company (MBC) • Specializes in custom designed power brushes • Started in 1851 • At the beginning of 19th Century, the brush business was largest employer in Baltimore • MBC was part of PPG Industries since 1904 • Had 750 employees at its peak with PPG • Established in 1990 as 100% employee owned USW ESOP • Now has 30 employees. Majority of the 70 former employees retired or left on their own accord

18. MBC cooperative governance structure – in a 100% S corporation ESOP • 4 internal board members • MBC president • Local union president • 1 selected by salary group • 1 selected by wage group • 3 external board members • 1 appointed by USW district director • 1 appointed by MBC president • 1 nominated by USW, affirmed by MBC

19. Maryland Brush mature markets Steel industry Nonferrous metals industry Truck Tire retread industry Industrial distributor market Special machinery market Welding industry By 2007 - Maryland Brush Company knew it needed newer products.

21. Old, inner-city EO companyleaps into new economy MBC decided to diversify outside of the brush industry Sought professional help It took 2-3 years to select the right consultant It took 2 years to select the right investment opportunity Expanding its product line from mature, declining market to new solar energy market 2010 MBC bought the IP and manufacturing rights for Photensity

24. MBC co-operative values informing diversification • Company sees itself as long term community asset • Reinvest in company • Maintain cash reserves for potential investment in core business or diversification opportunity • Balance risk to protect investment of older workers & jobs needs of younger workers • Involve employees in all major decisions • Retain any competitive edge • Maintain relationships

25. Union role in MBC diversification MBC sought & received funding from the State of Maryland and the US Department of Energy Needed all its political connections in this effort USW helped MBC get necessary government attention for its application

26. USW & Mondragon Union Co-op Agreement • 2009 USW and Mondragon Cooperative Corporation (MCC) announced intent to create unionized co-op companies in the US • 2012 USW, MCC and OEOC published “Sustainable Jobs, Sustainable Communities: The Union – C0-op Model” • 2012 Pittsburgh Clean & Green Laundry – union- co-op set to launch • 2012 Cincinnati Union Co-op Initiative – feasibility studies underway for 3 companies

27. Labor - patent strategies A US patent holder has the "the right to exclude others from making, using, offering for sale or selling the invention throughout the United States or importing the invention into the United States.” Inventors often have trouble getting large companies to respect their patent rights. Labor and inventors can work together to protect jobs and inventors. A labor-friendly entity holding US patents could exclude low-wage, non-union and non-domestic companies from making, using or selling in the US, or importing into the US, any products covered by its patents. Hawaii Sustainable Business Corporation Act enables such entities which can also be accomplished with L3Cs in Michigan

29. Inventors as labor allies & potential partners in worker owned businesses • 2006 – Detroit and Hawaii-based Ingenuity US, L3C (IUS) formed to implement labor-patent strategies • 2008- 2012 Numerous IUS pre-feasibility studies on potential living-wage businesses to develop in Detroit • 2006-08 – Hawaii Ingenuity Corp. Act passed and vetoed twice by GOP Governor • 2010 – Labor summit at UAW in DC on labor-patent strategies • 2011 - Hawaii Sustainable Business Corp. (SBC) Act passed & implemented

30. Job Creation/Protection Significance of Hawaii SBC lawfrom Chief Patent Judge Paul Michel (retired) November 2011 white paper "Key provisions of this new law harness the right to exclude conferred by patents creating and retaining good jobs in communities, upholding human rights and protecting the environment, while simultaneously increasing the asset value of the underlying intellectual property." 

31. Types of Employee Ownership • Traditional Corporate & LLC forms can be used • Need not include all employees, nor maintain EO • Securities law issues • Worker Cooperatives • Usually include all full-time workers & majority ownership • One vote per person • Member supermajority vote on selling to outsider • Some tax benefits • Capital financing can be difficult • Employee Stock Ownership Plan (ESOP) • ERISA Plan – Trustee decides about sale to outsider • Can own any % of Co. • May have substantial or limited EO voting & voice • Many tax benefits to seller, company & employees

32. ESOPs are: tax-advantaged (to seller, company, employee) employee benefit plans operating through a trust Company makes tax-deductible contributions of stock or cash to buy stock. Stock is allocated to accounts for individual participants. Participants receive stock or its cash value on retirement or termination of employment. Employees vote stock through a trust. Some are highly democratic, some are not. What are Employee Stock Ownership Plans (ESOPs)? Attorney Deborah Groban Olson www.esoplaw.com

33. Sale of a family owned business Sale of a majority interest in a company Where payroll is a high % of operating expense Where broad based employee ownership is desired When Company & Sellers have use for tax deductions Where independent valuation is acceptable to sellers Best Uses of ESOPs Attorney Deborah Groban Olson www.esoplaw.com

34. Cheap capital for business investment, expansion or divestiture Principal and interest tax-deductible Deduction for dividends to employees Deduction for dividends used by ESOP for debt retirement Deduction for dividends reinvested by employees Creating a local market for selling stockholders Anchoring jobs and business in local communities Local control over future investment or disinvestments Major Uses for ESOPs Attorney Deborah Groban Olson www.esoplaw.com

35. Basic stock bonus (non-leveraged) Leveraged ESOP in C Corp Rollover capital gains deferral ESOP (1042) Sub S ESOP ESOP Varieties Presented Attorney Deborah Groban Olson www.esoplaw.com

36. Tax deduction up to 25% of payroll to repay stock purchase loan principal + Unlimited tax deduction for payment of reasonable interest on ESOP loan + Dividends tax deductible – if paid in cash, used to pay debt, reinvested by participant + Tax on capital gains postponed indefinitely through rollover (for Subchapter “C” Company) to an ESOP or Eligible Worker Owned Cooperative Solution for business succession & provides market for closely held stock Increased cash flow and working capital Majority control can be maintained Greater productivity and motivation from employee owners ESOP Advantages for C Corp. Seller Attorney Deborah Groban Olson www.esoplaw.com

37. Opportunity to share in company’s growth and build capital Deferral and reduction of taxes Stock can be received at no risk or expense ESOP can save jobs Dividend income ESOP Advantages for Employee/Owners Attorney Deborah Groban Olson www.esoplaw.com

38. Advantages to Majority ESOP of Sub S Election • ESOP exempt from tax on its portion of Company income • Income grows tax free in ESOP & is only taxed to participants upon distribution • ESOP may distribute benefits in cash, not stock • No dissolution of S corp. due to ESOP distribution Attorney Deborah Groban Olson www.esoplaw.com

39. Basic Stock Bonus ESOP (1) Stock Contribution ABC Co. ESOP 1. Contributes stock 2. Allocates and distributes stock to employees Employees Attorney Deborah Groban Olson www.esoplaw.com

40. Basic Stock Bonus ESOP (2) Cash Contribution ABC Co. ESOP 1. Contributes cash 3. Allocates and distributes stock to employees Sells stock to ESOP 2. Purchases stock from owner for cash Employees Owner Attorney Deborah Groban Olson www.esoplaw.com

41. ESOP Financing – Subchapter C Company Borrows Funds to Issue New Stock and/or Purchase Stock from Owners Loan proceeds Subchapter C Company Bank Pledge Collateral Loan Payments Sale of stock Tax deductible principal and interest payments Loan Payments Mirror loan proceeds contributed to purchase stock ESOP Cash and capital gain deferral Gradual allocation and vesting of stock Sale of stock Resale of stock upon retirement Employees Selling shareholders Attorney Deborah Groban Olson www.esoplaw.com

42. Employee Accounts www.esoplaw.com Stock Valuation Contributions & Allocations Participation Vesting Distribution Taxes Growing your ESOP balance

43. Employees do not contribute to the ESOP Board of directors determines contribution amount each year – discretionary, but must be regular Except – if money borrowed thru ESOP, allocations must be made to employees as loan is repaid Allocated to account as of end of plan year Employee portion typically based on your eligible compensation – can be flatter Stock must be valued annually by an independent appraiser Contributions to the ESOP

44. Below are legal limits, plan can be more generous: Year of service = 1,000 hours Prior service may count 6-year graduated schedule or 3-year cliff schedule Exceptions Retirement, death, or disability Forfeit unvested balance Vesting

45. Retirement, death, or disability No later than one year after end of final plan year Any other reason No later than five years after end of final plan year Distribution Start Timing

46. Most distributions are in cash In some plans employees can demand stock Right to demand cash if company is not publicly traded Single lump sum, or Annual installments Over not more than 5 years Distribution Method

47. Defer taxes by rolling over IRA, or Other qualified retirement plan Take the cash 20% federal withholding 10% early withdrawal penalty Stock distributions Net unrealized appreciation Sell back to company – Put option Taxes on ESOP Distributions

48. More shares of company stock Additional shares contributed by company Shares forfeited by partially or non-vested participants who leave employment Shares redeemed from retirees re-contributed to ESOP Value Shares can increase in value with greater employee participation and continued product/service innovation based on long-term stake Value can decrease due to market pressures, poor management, or catastrophe– but participatory EO can turn these around How Employee ESOP Balance Can Grow

49. Truth, honesty, open dealing, forego politics & history With all people & facts affecting the decision to buy Buying and running the company Creating & operating a meaningful participation system Stock purchase based on careful, honest business plan, and fair valuation Adequate capital Technically competent management Management & employees educated on & willing to participate fully in participation system Elements for Success www.esoplaw.com

50. Elements for Failure www.esoplaw.com Insufficient capital Loss of key people or functions Failure to innovate Lack of clarity in stakeholder expectations – sellers, management or workers Dishonest valuation, fiduciary breach