Frequently Asked Questions - Employees

The term ESOP stands for Employee Stock Ownership Plan. ESOPs are a common structure for employee stock ownership across the United States. There are over 10,000 ESOP companies that operate in every business sector of the economy with combined national employment of over 10 million employees. Media companies that make use of ESOPs include the Bureau of National Affairs in Washington, D.C., a TNG-CWA employer with 1,800 employees (www.bna.com), the Monroe (MI) Evening News www.monroenews.com and the Omaha World-Herald (www.omaha.com).

The most recent high profile use of the ESOP structure in the media and newspaper industry took place in 2007 at the Tribune Corporation where financier Sam Zell used an ESOP to purchase that company which in turn ownsthe Chicago Tribune, the Los Angeles Times, the Hartford Courant, the Baltimore Sun and Newsday. 

Employers in Maine that make use of Employee Stock Ownership Plans include Maine Oxy Supply in Auburn, Howell Laboraties in Bridgton, Moody’s Collision Centers and the Pittsfield-based Cianbro construction company.

Legally, an ESOP is a specific form of defined contribution benefit or pension plan, in the same family of benefit plans as the well known 401(k) plan. Instead of investing in a wide array of stocks, ESOPs invest “primarily” in the stock of an individual employer. An ESOP gives employees of a company sponsoring the ESOP a “beneficial ownership interest” in the stock of the company sponsor, which is why employees of an ESOP company are referred to as "employee owners." Employees have a “beneficial ownership interest” because they don’t own shares directly, but rather, their ESOP shares are held by a legal Trust, and employee-owners sell their shares only when they retire or leave the company. These Trusts are administered by Trustees who are legally bound to pursue the best interests of employee shareholders, and who must follow employee-owners instructions on certain voting issues.

In larger transactions such as may come about in the Blethen Maine Newspapers, the Trustees would be selected by management of the acquiring corporation (here called “New Corporation” or “NEWCO”) in consultation with the unions representing employees of “NEWCO.” Should the ESOP option become a likely one for Blethen Maine Newspapers, we will offer much more information about how ESOPs function in the FAQ section.

For information about employee ownership, visit www.nceo.org, www.esopassociation.org and www.esca.us.

There are a range of other possible “employee-friendly” buyout strategies that should and will be considered alongside the ESOP strategy. Those strategies include the recruitment of one or more “employee friendly” private equity firms, some of which are funded in part with union pension funds, to take the lead ownership position in a buy-out. Other possible options include the recruitment of conventional private equity firms, the recruitment of one or more “deep pocketed,” presumably locally based investors, philanthropically motivated individuals or foundations either locally or nationally based and consideration of a non-profit structure. It is likely that in the case of Blethen Maine Newspapers a structure that combines one or more of these alternatives would be designed.

Employees are not the first group that comes to mind when considering the purchase of large and expensive corporations. But the facts are that for over 32 years, employees, with the help of banks, private investors and the Federal Tax Code have become significant shareholders in over 10,000 corporations in the United States.

Recognizing the financial limits facing ordinary employees interested in buying their companies, the architects of ESOP legislation in the Congress have created a range of tax incentives and investment mechanisms to induce business owners to sell companies to employees. In a small number of these cases employees have also chosen to invest a prudent percentage of their 401(k) funds in the creation of successful ESOP enterprises. Research has demonstrated that ESOP legislation has worked, that is, (1) ESOPs have given millions of employees access to ownership opportunities which they would not have had the financial resources to take advantage of on their own, and (2) the vast majority of ESOP companies are successful, ongoing enterprises http://www.nceo.org/reference/research.html.

Due to a recent (1997) amendment to ESOP legislation, additional incentives were created that encourage outside capital sources to partner with employee groups to achieve employee ownership. This 1997 amendment to ESOP legislation allows for the creation of Subchapter “S” Corporations where the ESOP Trust (or “ESOT”) is the sole or primary shareholder of a corporation. By electing “S Corporation” status, these companies, like all other S Corporations throughout the United States operate on a “tax-free” basis at the Federal level. To be clear, tax obligations do not disappear for individual participants in S Corporation ESOPs. When those participants leave or retire from an ESOP employer, they must either roll their account value into another tax favored plan such as an IRA (and eventually pay taxes when that plan is cashed in) or, if departing ESOP participants choose to immediately cash out their accounts, they must pay taxes on the balance in their respective accounts at the individual rate. To summarize, 100% S Corporation ESOPs operate free of Federal tax. Individual ESOP participants, however eventually do pay individual income taxes on the value of their ESOP accounts.

One selectively used feature of S Corporation ESOPs (and C Corporations) is the ability that employees have, on a fully discretionary and voluntary basis, to “roll-over” a prudent percentage of their defined contribution plan assets (usually 401(k) assets) on a tax-free basis into an ESOP. In companies with a large payroll base, these 401(k) asset “roll-overs” can provide a necessary layer of equity to enable employees to buy companies.

We should reinforce that any use of 401(k) roll-over assets in these cases, should that structural feature be deemed useful at all, would be entirely discretionary on the part of individual employees. No employer, investor group or union organization, including The Portland Newspaper Guild-CWA, can or should compel individuals to make that particular investment decision with their personal funds. Regardless, in most all cases, employee equity “roll-overs” from 401(k) funds will not provide sufficient financing to acquire large corporations. Other “deep pocketed” investment sources will almost always be required to consummate an ESOP purchase of a corporation.

If the business outlook for an ESOP enterprise is strong, it should be possible to attract at least two forms of debt financing; 1) conventional commercial bank debt and 2) “mezzanine” debt that, together with investor and potentially employee equity, can generate sufficient funds to acquire large corporations.  Since it occupies a higher risk position, mezzanine debt commands a high interest rate. One reason that mezzanine investors are ready to compete in order to invest in ESOP transactions is that S Corporation ESOP investments are a unique niche. They are the only targets for investment that are “tax-free” from an operating company standpoint.  Presuming that the investment target – in this case a group of Blethen Maine Newspapers (or potentially individual newspapers) – is profitable, the “premium” afforded by being both profitable and “tax-free” at the corporate level makes S Corporation ESOPs uniquely attractive to mezzanine debt investors.

In the case of the Blethen Maine newspapers, the S Corporation ESOP strategy may or may not be explored by potential lead investment groups along with more conventional ownership strategies. The primary objectives of the TNG-CWA effort is to preserve the commitment that union workers have to the profession of journalism, within companies that are well funded enough to invest and prosper in competitive media markets over the long term.

ESOPs are employee benefit plans that can be introduced by employers without employee consent. The primary exception to this standard regards employers covered by collective bargaining contracts. ESOPs are a mandatory subject of bargaining so union groups must be consulted if employers wish to include union members in an ESOP.

Most ESOPs, including very possibly an ESOP structure that could take place with the Blethen Maine newspapers, do not involve any direct, “at-risk” equity investment by employees. They are, instead, benefit plans that companies design both to benefit from the tax advantages they provide and to motivate employees.

Most ESOP transactions that have been reported in the media over the past thirty years in unionized industries such as steel, auto and airlines have been “concessionary” or “investment bargaining” ESOPs where ESOP stock is “traded” in exchange for concessions in wages, benefits and work rules. It is interesting to note that these situations amount to no more than 2% of the many thousands of ESOP transactions completed over the past 30 years, a tiny fraction of the total. But they are the transactions that have attracted the most press. In most of the “concessionary” or “investment bargaining” cases, all union members must follow the decisions made by their union leadership, often after a rank-and-file vote. In case of the Portland Newspaper Guild, the final decision would rest with the membership.

The fact that an S Corporation ESOP may be considered in the case of the Blethen Maine Newspapers does not necessarily mean that investors, beyond the employee base, will not expect a review of the costs of existing labor contracts. Any possible changes to those contracts though would have to proceed through ordinary collective bargaining, in this case with a new management team representing “New Corporation” or “NEWCO.”

The decision to explore the creation of a large new media corporation, “New Corporation” or “NEWCO,” to serve as the “parent” for all the union papers of the Blethen Maine Newspapers is driven by economics.  Aggregating the assets of three (Portland Press Herald/Maine Sunday Telegram, Kennebec Journal and Morning Sentinel) papers raises the likelihood of attracting the investment capital necessary to launch a new, newspaper-centered, media corporation.  It is also more likely that a larger corporation will be able to attract management talent that can steer “NEWCO” through tricky and shifting national and international media markets.  It remains possible, however, that individual papers could be sold independently. 

The selection of senior management for the successor corporation to the Blethen Maine Group, which we refer to here as “NEWCO,” will be driven by the wishes of those investors who are putting forth the risk capital to consummate a transaction. In the case of the Blethen Maine Group, if an ESOP structure is incorporated into the sale process, the Newspaper Guild would seek a consultative role regarding those decisions.

The senior management of “NEWCO,” its President and CEO in particular, would report to a Board of Directors. The founding Board of Directors of “NEWCO” would be selected by investors. If a significant ESOP is part of the final ownership structure, the Newspaper Guild and other labor organizations with affected employees would seek consultation on the selection of the Board including possible direct or indirect representation. Candidates for the Board of Directors of “NEWCO” would be selected primarily on the basis of their professional contribution, on how their skills and contacts can help grow “NEWCO’s” business and meet the industries challenges. Over time, seats for the Board of Directors of “NEWCO” would be subject to an election process that reflects the investment stake of different investment groups.

On a day-to-day basis, the same general operating procedures and practices that govern efficient newspapers in the current media market would prevail at NEWCO. Management would retain the power to hire and fire. Unions would still collectively bargain.

While the general operating structure of  the “NEWCO” Corporation imagined by the Newspaper Guild would be familiar, there should also be important opportunities for improving the day to day work environment and decision-making practices of “NEWCO” to be consistent with its “employee friendly” origins. If significant employee ownership is a feature of the final “NEWCO” ownership structure, it should be possible for management and labor to construct a new form of “partnership” that has both economic and psychological underpinnings. Such a partnership should contain adequate incentives for up to now, unrealized levels of transparency, efficiency, communication and trust.  Such a partnership should produce newspapers that can serve their communities without the same kind of distractions that industry commentators agree have undermined the profession of journalism in recent decades.

The employee owned “NEWCO” imagined by the Newspaper Guild would not be “utopia.”  It would create its own, new challenges and headaches, and would probably retain certain of its old ones as well.  But it would also offer NEWCO employees, union and non-union, a special opportunity to have a real economic stake in their work place, to have a new voice its strategic future, and the ability to improve the conditions of  their day-to-day work. The structure the Newspaper Guild imagines would represent a departure for the newspaper industry at a time when new thinking is needed more than ever before.