MARCH 2023 VOLUME XLIII, NO. 3 EMPLOYEE OWNERSHIP REPORT The NCEO is a self-sustaining nonprofit membership organization that helps employee ownership thrive. We provide practical resources and objective, reliable information on employee stock ownership plans (ESOPs), equity compensation plans, and ownership culture. Continued on page 4 ISSUE HIGHLIGHTS ● The chair and immediate past chair of the NCEO’s board of directors introduce The State of the NCEO. See page 3. ● New NCEO research details the costs of ESOP litigation settlements and decisions over the last 10 years. See page 5. ● The complex rules of ESOP distributions are discussed on page 8. ● Read about new ESOPs in Company Highlights on page 9. ● Circuit court and magistrate court both rule that arbitration clause does not apply. See Cases & Rulings on page 10. ● Redeeming vs. recycling shares: see the Employee Ownership Q&A on page 11. ● State employee ownership bills have made progress. See News & Ideas on page 11. ● This issue’s Owners’ Page discusses ESOPs and your retirement plan on page 12. STATE SMALL BUSINESS CREDIT INITIATIVE (SSBCI 2.0) The SSBCI Can Help Grow Your Company and Create New Employee-Owners By Steve Storkan, Employee Ownership Exchange The American Rescue Plan Act of 2021 reauthorized and funded a new round of the State Small Business Credit Initiative (SSBCI 2.0), which provides a combined $10 billion to states, the District of Columbia, territories, and tribal governments to empower businesses to access capital needed to invest in job-creating opportunities as the country emerges from the COVID-19 pandemic. Each state is responsible for creating the SSBCI 2.0 programs they will use to deploy federal dollars received. As of February 9, forty states have been approved by the Treasury to implement their proposed SSBCI programs, and sixteen of those forty are accepting applications from lenders on behalf of businesses. This round of SSBCI money included employee ownership as one eligible purpose. The intended end users of the SSBCI 2.0 programs are businesses with fewer than 500 employees, with an additional focus on businesses owned by socially and economically disadvantaged individuals. Authorized uses of the funds include startup costs, working capital, business procurement, franchise fees, equipment, and inventory, as well as the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. The key aspect to know about SSBCI is that in almost all cases, the program requires a private loan between a financial institution and a business that is being supported by the state SSBCI dollars—that is, no dollars are being directly lent to business by the SSBCI program. To best illustrate this concept, let’s explore two specific state SSBCI programs: the Minnesota Loan Guarantee Program and the Michigan Collateral Support Program. The Minnesota Loan Guarantee Program provides a guarantee of up to 80% of a private loan to a company with fewer than 750 employees, with a maximum Continued on page 2 CULTURE Why People Leave Their Jobs —and What to Do About It The “great resignation” is not the first time retention issues have been a hot topic. Back in 2008, the NCEO looked at this issue in the article that follows. It still resonates today. Employee-owned companies have less turnover than non-employee-owned companies, but it is a rare company that does not lose people it values. What makes people leave? And what, if anything, can you do about it? Research tells us that a lot of people leave for reasons beyond the control of the company; others seize an opportunity for substantially better compensation. But the biggest factor in turnover is unhappiness with the content of the job. 2023 Weekly Webinars in Full Swing! We have a full year of new webinar content to enjoy! Join us every Tuesday at 9:30 am PST / 12:30 pm EST to learn from experts in the employee ownership community. Visit the live webinar landing page to check out upcoming webinar topics. Register today to secure your seat in the Zoom room. ©2023 National Center for Employee Ownership Permission to reprint must be requested in writing. ISSN: 0899-8833 Employee Ownership Report is published online monthly by the National Center for Employee Ownership. For membership fees or information, contact: National Center for Employee Ownership membership@nceo.org 510-208-1300 NCEO.org EMPLOYEE OWNERSHIP REPORT NCEO STAFF: Megan Bonwell Joanne Burns Evelyn Castro Michelle Cronin Grace Dawson Nan Fitzgerald Timothy Garbinsky Dallan Guzinski Madelyn Hammack Nathan Nicholson Jaymie Oviedo Scott Rodrick STAFF HIGHLIGHT Megan Bonwell Megan Bonwell is the NCEO’s event manager. In this role, Megan works hand in hand with our Senior Director of Events to oversee and execute event strategy, timelines, and logistics. Megan has her bachelor’s from Cal Poly San Luis Obispo in Recreation, Parks, and Tourism Administration and her master’s in Project Management from the University of Southern California. She is also a certified Project Management Professional (PMP) through the Project Management Institute (PMI). In her free time, Megan enjoys spending time at home with her family, walking her dog, woodworking, and cooking and baking for her family and colleagues. n Ramona Rodriguez- Brooks Aaron Supple Charlene Thomas Suzanne Vinson Nancy Wiefek SENIOR STAFF: Corey Rosen EXECUTIVE DIRECTOR: Loren Rodgers guarantee of $800,000. This guarantee is meant to provide a lender with confidence that there will be a level of repayment in case of default on the loan. In contrast, the Michigan Collateral Support Program provides up to $5 million in cash collateral to enhance the collateral coverage of a borrower by depositing that cash into an account with the lender. As mentioned before, each state has created its own SSBCI programs, but many of them take the form of loan guarantees, loan participation, or collateral support like these examples. So, with all this new information, you may wonder: how does SSBCI 2.0 help me grow my business and create new employee-owners? After a mandate from Congress to the Treasury Department that employee ownership be included in SSBCI 2.0, many individuals from the employee ownership community were instrumental in providing the Treasury with the information and guidance needed to carry out this mandate. In the end, ESOPs, worker cooperatives, and employee ownership trusts were specifically identified in the SSBCI 2.0 regulations issued by the Treasury. With this in mind, there are two ways that employee ownership can be expanded using SSBCI 2.0 programs. First, although SSBCI dollars cannot be invested in a loan used to purchase the ownership interest in a business, there is an exception for the purchase of a business that results in an employee stock ownership plan, worker cooperative, or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business. The original intent of this exception was to expand employee ownership by providing state-backed loans for retiring business owners to use to sell their companies to ESOPs, worker cooperatives, or employee ownership trusts. In direct response to a question I posed to the Treasury Department’s SSBCI Support Team, they confirmed that a current employee-owned company (regardless of the ownership percentage) can use SSBCI programs to support loans they receive to purchase a majority interest in another business. Simply put, you can use SSBCI programs to help finance the acquisition of another company, thereby creating new employee-owners in your company. Second, SSBCI programs should be viewed by employee-owned companies as a way to increase their access to capital for buying new equipment, creating new product lines, building or improving facilities, or any other step towards expanding their business. Have you been considering buying the land next to your facility to expand your manufacturing plant, but your banker has questioned the collateral you have available? Have you been looking at a new machine that would increase productivity, enabling you to hire more employees to support this growth, but the bank underwriters aren’t seeing it the same way as you? The loan guarantee, loan participation, and collateral support programs of SSBCI can be used to encourage a financial institution to give greater consideration to your opportunities for growth and ultimately to expand employee ownership. Last, we would like to collect data on the use of SSBCI programs by employee-owned companies. If your company applies for an SSBCI program, please send me an email at sstorkan@ eoxnetwork.org. n For more information on SSBCI, please visit the following resources: ● List of SSBCI Program Contacts by State ● Treasury Department SSBCI Website ● Council of Development Finance Agencies SSBCI Resource Center Steve Storkan is the executive director of the Employee Ownership Expansion Network (EOX). Steve has worked in the employee ownership realm for 25 years, most recently as the Director of ESOP Administration for Alerus Retirement and Benefits, where he worked with businesses in the creation of their ESOPs and the technical administration/compliance required in subsequent years. Steve spent 11 years as a member of the board of directors of the Minnesota-Dakotas Chapter of the ESOP Association, where he also served as chapter president and VP of Government Relations. Steve holds a CFP ® designation from Minnesota State University, Mankato. STATE SMALL BUSINESS CREDIT INITIATIVE (SSBCI 2.0) Continued from page one NCEO EMPLOYEE OWNERSHIP REPORT MARCH 2023 / PAGE 2