Numerous observers, including both authors, have raised questions about employee stock ownership plans (ESOPs), which are a specialized category of retirement plan intended to invest primarily in securities issued by the sponsoring employer. Such arrangements are actively encouraged under federal law, as qualified retirement plans under section 401(a) and as eligible for significant additional, ESOP-specific tax subsidies. By design, ESOPs result in employees becoming effectively the owners of their own employer, via beneficial ownership of stock held by the plan. Although this idea can sound attractive, many have expressed concern from the standpoint of retirement policy: ESOPs have the effect of concentrating employees’ retirement assets in a single stock—which would be troubling enough if the concentration were in any stock, but is much more so given that, in an ESOP, the concentrated investment is in employer stock. Risk of catastrophic loss of retirement security is thus simultaneously aggravated through lack of investment diversification and directly correlated with risk of job loss.
In this Article, however, the authors suggest that while ESOPs as currently constituted and subsidized are difficult to defend, nonetheless in some circumstances persuasive policy arguments exist for continuing to permit—and in special cases even encouraging—collective employee ownership of employer securities. Such arrangements should simply not be structured or regulated under the retirement system. For example, sometimes the proprietor of a business wishes to retire or otherwise liquidate his or her holdings, but no viable buyer can be found. In that situation—a not-uncommon context for creation of ESOPs, currently—it can often be argued that the best, most efficient available result may be for the company’s employees to join together, secure financing on some collective basis, and purchase and continue to operate the business themselves.
Under state and federal securities laws, however, it is currently far from clear whether such an arrangement could feasibly be established except by using an ESOP: that is, by using a retirement plan. We accordingly propose that the current retirement-based, tax-subsidized ESOP model of employer stock ownership be replaced by a new type of arrangement that would be treated and regulated as an investment vehicle by the Securities and Exchange Commission, much like a mutual fund, rather than by the Department of Labor and the Service under the U.S. retirement-plan system. Employee protections would be borrowed from the existing ESOP regime. Current retirement-plan tax subsidies would be eliminated, but the specific tax-deferral subsidy now available under section 1042 for security sales to employerstock plans would be continued and even enhanced, albeit better targeted to arrangements for which the public subsidy makes sense.