Small Business

Sharing the Wealth, Not the Vote


By Karen E. Klein Q: Are there any employee stock-ownership plans that do not allow the employees to vote or have a say in the company when they are fully vested?

---- R.G., Dardanelle, Ark.

A: Other than ESOPs (employee stock-ownership plans), most stock plans can be structured to avoid giving employees voting rights. Vesting is not usually a factor in whether or not employees under these plans get voting rights in the company, experts say.

Here's a run-down of several common stock-option plans, and how they deal with the issue of voting rights:

Employee Stock-Ownership Plans

ESOPs are a type of tax-qualified retirement plan, like a 401(k), that are designed to be invested in stock of the employer company. If the ESOP borrowed funds to purchase the stock, the voting rights are not required to be passed through to the employees who participate in the plan until the shares have been paid for, says Kirk Maldonado, an attorney with the San Francisco-based law firm of Brobeck, Phleger & Harrison.

"For example, if the ESOP pays off 10% of the loan in the first year of the loan, then the ESOP participants are entitled to vote 10% of the shares that were purchased with that loan," Maldonado explains.

If the company is publicly held, the ESOP participants get to vote the fully paid shares on all matters requiring a shareholder vote, such as the annual election of the board of directors. On the other hand, if the company is privately held, then the ESOP participants are required to be permitted to vote the fully paid shares only with respect to a very limited number of transactions, such as closing, sale, and relocation.

In all other situations, the ESOP participants do not get a mandatory vote of privately held employer stock, although a large minority of employee-ownership companies voluntarily provide that right.

Stock-Purchase Plans

These almost always come with voting rights and apply to public companies, since few private companies allow employees other than key executives to buy stock, says Corey Rosen, executive director of the National Center for Employee Ownership, a nonprofit organization based in Oakland, Calif.

401(k) Plans

Here, the scenario is similar to stock-purchase plans, except that companies may also contribute shares to the plan. "In public companies, [the stock] would usually be voting common, but could be nonvoting stock, provided it is a traded class of securities," Rosen says. Sometimes, but not often, the plan has trustees who vote the shares, he says. In closely held companies, voting rights would not be mandatory, although the company could allow them to vote the shares.

Tax-Qualified Plans

They're used for retirement savings, such as stock-bonus and profit-sharing plans, and the company contributes stock. Usually, it is either nonvoting stock, or the plan trustee votes it.

Stock Options

Employees get only the right to buy stock, rather than the stock itself, and there is no vote granted for the option. In most cases, when employees exercise their purchase options, they buy common stock with voting rights. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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