The paper studies the relationship between central features of the capital structure and terminations of ESOP plans in the US.
Abstract
Purpose
The paper studies the relationship between central features of the capital structure and terminations of ESOP plans in the US.
Design/methodology/approach
The research methodology is primarily based on reviewing the existing literature and includes elements of original comparative analysis.
Findings
We find that externally imposed repurchase obligation, the stochastic element to repurchase obligation and the discontinuous vesting of ICA shares undermines the sustainability of employee ownership in the Employee Stock Ownership Plan model.
Research limitations/implications
Strengthening employee-owned firm the structural architecture of employee-owned firms (EOF) can help to improve sustainability of the socially preferable alternative in the market economy.
Practical implications
In light of the increasing global interest in employee ownership, our research underscores the need for institutional learning to adapt EOFs to contemporary economic environments.
Social implications
Strengthening employee-owned firm the structural architecture of employee-owned firms (EOF) can help to build the case for the socially preferrable business ownership model for the market economy.
Originality/value
This paper contributes to the employee ownership literature by providing understanding of the role of capital structure in the US ESOP model and terminations of ESOP plans and suggesting some novel ideas in addressing the challenges.
Details
Keywords
In addition to increased regulation and platform co-operatives, this paper proposes a third option to address the problem posed by the labor-based platform (LBP) companies and…
Abstract
Purpose
In addition to increased regulation and platform co-operatives, this paper proposes a third option to address the problem posed by the labor-based platform (LBP) companies and companies' treatment of de facto employees as “independent contractors,” thus avoiding the usual employee benefits.
Design/methodology/approach
The paper outlines the history and structure of Employee Stock Ownership Plans (ESOPs) as a mechanism to achieve partial worker ownership of companies.
Findings
The possibility of establishing ESOPs in the local subsidiaries of platform companies is outlined as the third option to reform LBPs.
Practical implications
Whether this option is available in the United States of America is not clear without new litigation or legislation since the existing USA ESOP is for “employees” and the problem is that the LBPs do not classify these platforms' full-time workers as “employees.” Hence, this third option may be mainly relevant to other countries for LBPs that are not already established.
Originality/value
The ESOP approach to changing LBPs is a new suggestion in addition to the usual approaches of increased public regulation and establishing new worker-owned platform co-operatives. The ESOP is a new tool in the hands of municipal and national governments to require in order for the LBPs to be able to operate.
Details
Keywords
Jens Lowitzsch, John D. Menke, Denis Suarsana, Graeme Nuttall, Tej Gonza and Thibault Mirabel
With a third of business successions failing, the EU is still confronted with a haemorrhage of around 150,000 enterprises and 600,000 jobs every year. Although 30 years of…
Abstract
Purpose
With a third of business successions failing, the EU is still confronted with a haemorrhage of around 150,000 enterprises and 600,000 jobs every year. Although 30 years of research have confirmed the positive effects of employee share ownership (ESO) for European enterprises and its important function for business succession, best practice, such as the US ESOP, is thinly spread across the EU. Nevertheless, Member States (MS) have developed a broad variety of ESO schemes involving intermediary entities to acquire and administer employee shares in the employer firm in particular for the transfer of businesses to employees. However, for small and medium enterprise (SME) owners the main barrier is still a lack of clearcut and transparent options to sell their enterprise to their employees and corresponding incentives to do so. In this light, this paper proposes a European approach, that is, a European Employee Stock Ownership Plan (European ESOP).
Design/methodology/approach
A “Common European ESOP Regime”, as a first step towards a “Common European Regime on EFP” would complement existing national laws aiming primarily at their harmonisation. As the name suggests, this would be a second contract law regime parallel to national legislation on ESO. Its objective is to eliminate obstacles to the single market that mainly, though not exclusively, stem from heterogeneous regulatory density. The existing obstacles are due to the multifarious development of national laws governing employee financial participation (EFP) in the MS. The “Common European ESOP Regime” would offer employers and employees a choice between two alternative EFP regimes one originating in national legislation, the other in European legislation. The choice between these two alternatives would be entirely optional, as in the case of the European Company Statute.
Findings
The European ESOP is modelled on the US ESOP and EU best practices. It embraces six European types of legal vehicles, i.e. the employee ownership trust (EOT), the French employee ownership mutual fund (FCPE), the Austrian civil law foundation, the Spanish Sociedad Laboral, the cooperative and the closely held limited liability company.
Originality/value
The “Common European ESOP regime” would neither replace nor override national legislation but would serve as a cross-border alternative to national laws, to be used at the discretion of the parties involved. Regarding its contents, it would contain best practice rules derived from each of the ESOP vehicles discussed to reflect the entire life cycle of SMEs (starting up, consolidation and succession).
Details
Keywords
This paper collects together quotations and extracts from 19th and 20th century thinkers who were little-known for being supporters of workplace democracy.
From the first PEPPER report in 1991 until this PEPPER V Report the EU has not only expanded from 12 Members States to currently 27 but also faced complex and urgent challenges…
Abstract
Purpose
From the first PEPPER report in 1991 until this PEPPER V Report the EU has not only expanded from 12 Members States to currently 27 but also faced complex and urgent challenges. Both the financial crisis of 2008/09 and the coronavirus disease 2019 (COVID-19) pandemic 2020/21 have left their marks on “Social Europe”. Although the overall dynamic of employee financial participation (EFP) across the EU 27 is positive, EFP is declining in terms of its share of household income in the light of the concentration of capital ownership and of capital income. Along with the issue of distributive justice, other challenges, such as business succession in small and medium enterprises (SMEs) that have been on the agenda for decades, and new ones like the extension of EFP to social enterprises, are calling for action.
Design/methodology/approach
From the comparison of the countries, the cluster analysis and the background of the importance of legal framework and fiscal incentives, two general principles can be derived: (1) establishing EFP schemes through legislation is of primary importance as countries that provide a stable and transparent regulatory framework for EFP also show a wider implementation of EFP practices; (2) when properly designed, fiscal incentives promote the spread of EFP effectively as both countries with a long tradition of tax incentives for EFP (e.g. UK, France) and those with a more recent development (e.g. Austria) confirm.
Findings
It is against this background that the following policy recommendations should be read. Tax incentives should (and in most countries they actually do) target those taxes, which constitute the heaviest burden in the national taxation system. (1) Tax incentives should be provided for both employees and the employer company. (2) Even substantial tax incentives may prove inefficient when the pre-conditions for eligibility are too restrictive, complex or inflexible. (3) Some forms of tax incentives are more suitable for certain types of plans, e.g. deferred taxation for employee share ownership (ESO), capital gains tax in lieu of personal income tax for dividends and sale of shares, or tax exemptions for matching contributions for European Employee Stock Ownership Plans (ESOPs).
Originality/value
In light of this need for SME action and the great potential for introducing ESO in this enterprise segment, from our recommendations we emphasise in particular: Alleviating the evaluation problem in unlisted SMEs through debt-to-equity-swaps. ESO may initially take the form of an employee loan to the company, creating corporate debt, which is subsequently converted into company shares. Facilitating share transfers in privately held limited liability companies (LLCs) by ending the requisite for notarial certification (Italy and France) or limiting it to the identity of seller and buyer. ESO in SMEs via intermediary entities, e.g. trusts, foundations, LLCs or other special purpose vehicle (SPVs) to hold and administer employee shares (AT, IE, UK, HU, FR, SI, USA).
Details
Keywords
Denis Suarsana and Jens Lowitzsch
As this article reports, in recent years most legislative activities focused on start-ups, with as many as 12 European Union (EU) Member States having introduced tax incentives…
Abstract
Purpose
As this article reports, in recent years most legislative activities focused on start-ups, with as many as 12 European Union (EU) Member States having introduced tax incentives for employee share ownership (ESO) in this type of small and middle-sized enterprise (SME). But incentivising ESO in SMEs should be extended to all SMEs, the engine of the European economy, including those from the social economy, having shown their crucial function for the resilience of our societies during the COVID-19 pandemic.
Design/methodology/approach
Against the background of this recent and very dynamic development this article, it provides an overview of the start-up business segment in comparison to other types of companies, particularly focusing on differences with the SME sector; examines the legal regulations that hinder a broader adoption of ESO in European start-ups; presents best-practice examples to demonstrate the favourable conditions already established in some EU Member States and discussed whether these reforms and best practice examples could be extended and – as is already the case in some countries – applied to the whole SME population including social economy enterprises.
Findings
Since the European Commission launched the 2011 Social Business Initiative (SBI) followed by the 2016 Start-up and Scale-up initiative, many actions to support social enterprises in view of their potential to address societal challenges and contribute to sustainable economic growth have followed. Most recently, the 2021 Social Economy Action Plan of the European Commission gave important impulses. The potential of employee buyouts offering a continuation perspective to SMEs owners looking for successors was highlighted in the 2022 EC report “Transition Pathway for Proximity and Social Economy,” calling for the implementation of Employee Stock Ownership Plans (ESOPs).
Originality/value
The situation of employee share ownership in start-ups has some parallels with that in traditional SMEs, but in many respects, they differ fundamentally. Although, on the other hand, social enterprises may also have to compete with large firms for qualified staff and face challenges when growing or scaling their activities, the reason why ESO in this enterprise segment is not widespread in the EU is altogether different. In the absence of a prescribed legal form of incorporation, social enterprises operate in various forms (be it for profit or non-profit), e.g. cooperatives, closely held limited liability companies, mutuals, associations, voluntary organisations or foundations. Therefore, this article looks into the extension of the incentives for ESO to social enterprises inasmuch as they are organised in legal forms allowing for share ownership, above all in the form of limited liability companies.