Employer Stock Ownership Plans:

Who Benefits Most in Closely Held Companies?

HRD-80-88: Published: Jun 20, 1980. Publicly Released: Jun 30, 1980.

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The Employee Retirement Income Security Act of 1974 (ERISA) requires that Employee Stock Ownership Plans (ESOP) be established and operated exclusively for the benefit of participants and their beneficiaries. Additionally, ERISA (1) defines an ESOP as a stock bonus plan or a stock bonus and money purchase plan that meets the qualification requirements of the Internal Revenue Service; and (2) provides that an ESOP be designed to invest primarily in employer securities, and to maintain individual accounts for each participant. In order to determine if there are problems that require corrective legislation and to determine if employee motivation or productivity is affected by the ESOP, a review was undertaken of Federal contractors' ESOP. The review selected operational aspects of the ESOP at 13 companies where stock was closely held and at 3 companies where the stock was publicly traded.

An analysis of ESOP transactions showed that most were not being operated in the best interest of participants. Specifically, GAO found that in the closely held company plans: (1) the companies sold or contributed company stock to the ESOP at questionable prices; (2) participants were not assured of a market for company stock distributed by the ESOP; and (3) participants generally were not permitted to vote or direct the voting of company stock allocated to their ESOP accounts. However, GAO did not observe in the publicly traded companies' ESOP, the problems identified with stock valuations, marketability, and voting of stock. Also, GAO found that management had not tried to assess the effect of the ESOP on its employee's motivation and productivity, and the lack of specific valuation regulations and the failure of some appraisers to use available guidance contributed to the problem of determining fair market values of stock not regularly traded in a recognized market.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: The Congress should enact legislation to: (1) provide that full and unrestricted voting rights be passed to ESOP participants for all employer stock allocated to their accounts; and (2) require plan provisions for redeeming, at fair market value, all company stock distributed by the ESOP.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretaries of the Departments of Labor and the Treasury should: (1) develop and promulgate, through regulations and implementing procedures, more specific criteria and guidelines for valuing the stock of closely held companies and require that such guidance be consistently applied; and (2) develop and implement a program for providing special systematic scrutiny of ESOP transactions.

    Agency Affected:


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