Proposal for a Non-Subsidized, Non-Retirement-Plan, Employee-Owned Investment Vehicle to Replace the ESOP

26 Pages Posted: 30 Apr 2018 Last revised: 13 Jul 2018

See all articles by Sean M. Anderson

Sean M. Anderson

University of Illinois College of Law

Andrew Stumpff Morrison

University of Michigan Law School; University of Alabama Law School

Date Written: February 15, 2018

Abstract

The authors have previously been critical of the existing American legal exemption and subsidy regime for employee stock ownership plans (“ESOPs”). By definition such plans create dangerously undiversified investment programs tying employees’ retirement security to the financial health of a single company – which, to compound the problem, is the employees’ employer, thereby correlating participants’ retirement security risk with the risk of losing their jobs. No demonstrated compensating policy benefit justifies this extraordinary large-scale departure from basic principles of financial prudence. One context, however, where a plausible case might be made for employee ownership is that which arises when a small-company founder retires and doesn’t wish to sell to an (or there is no available) outside buyer. An argument could be made that it should be permissible in that context for the company’s employees to form some collective finance vehicle to purchase all the shares; and perhaps the government might find a way to facilitate or at least allow that. But it shouldn’t be through the retirement system. A conceivable alternative would be to abolish ESOPs but amend the securities laws to allow establishment of an all-employee-owned trust, somewhat analogous to a mutual fund company, to borrow money and buy a company’s shares. Such a thing is currently effectively impractical under federal law except in limited situations amenable to the use of “employee cooperatives.” The new type of proposed entity would not be characterized or treated as a retirement plan, and it would not be tax-subsidized. (And we would need to retain and even strengthen regulatory protections involving such things as stock valuation. That, however, could be modeled after and subject to enforcement mechanisms similar to those that apply to mutual funds, which are subject not to ERISA but instead to securities regulation under the Investment Company Act of 1940.) This approach might be more politically feasible than simple abolishment of ESOPs without any replacement.

Keywords: ESOP, Employee Stock Ownership Plan, Retirement Plans, Retirement Policy, Tax Subsidy, Diversification, Business Organization

JEL Classification: G38, K22, K34

Suggested Citation

Anderson, Sean M. and Morrison, Andrew Stumpff, Proposal for a Non-Subsidized, Non-Retirement-Plan, Employee-Owned Investment Vehicle to Replace the ESOP (February 15, 2018). Tax Lawyer, Vol. 72, No. 2, 2019, Forthcoming; U of Michigan Law & Econ Research Paper No. 18-012; University of Illinois College of Law Legal Studies Research Paper No. 18-23. Available at SSRN: https://ssrn.com/abstract=3161771

Sean M. Anderson

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
217-244-8256 (Phone)
217-244-1478 (Fax)

Andrew Stumpff Morrison (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

University of Alabama Law School

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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