We can all agree that the most pressing need is to secure favorable ESOP legislation. Favorable ESOP legislation is absolutely necessary in order for the ESOP concept to grow and prosper in Europe.

ESOPs have gained widespread acceptance in the United States over the last 20 years due to the existence of favorable tax legislation. My purpose in speaking is to share with you our experiences in the U.S. in securing this type of legislation.

In this regard, I would like to make four specific recommendations.

The first recommendation is that you should attempt to secure recognition of the ESOP concept by securing small technical changes rather than attempting to legislate an entire new concept. In the U.S., we found that it was much, much easier to secure small technical changes than to legislate an entire new body of law.

In this regard, my second recommendation would be to commence the process by lobbying to have the ESOP recognized as an extension of a qualified profit sharing plan. The laws of practically all countries provide for the existence of qualified profit sharing plans. Hence, all that is needed in the first step is for the ESOP to be authorized as an amendment, replacement, or conversion of an existing profit sharing plan. This step is absolutely necessary so that ESOPs will not be subject to the same fiduciary restraints as profit sharing plans. Profit sharing plans, for example, typically require diversification of investments and prohibit substantial investment in shares of company stock. An ESOP, on the other hand, should be exempt from these requirements since it is designed to be "invested in company stock."

Once the ESOP has been recognized as an alternative plan to a qualified profit sharing plan, the next step is to secure legislation permitting ESOPs to be leveraged. Several countries, for example, already authorize profit sharing plans to be primarily

invested in company stock. However, a plan of this type only serves to operate as an employee benefit plan. A major objective of the ESOP is to not only provide for an employee benefit, but also to provide for a tool of corporate finance. Without the ability to leverage, employees are left without any meaningful tool for competing in the world of corporate finance. Strategic acquirers clearly have recourse to leverage to make strategic buyouts. Similarly, management buyouts also rely heavily on the ability to use leverage. Clearly, employees should also have the ability to use leverage if they are to play on a level field.

Because ESOPs can be leveraged in the U.S., they have been particularly useful in preserving jobs and in securing the continued survival of many firms. In the U.S., there have been thousands of firms that have been in danger of being closed and/or liquidated. Many of these firms are family businesses that are no longer considered to be growth companies in today's high-tech environment. Nevertheless, many of these firms are economically viable and provide full-time employment for thousands of employees. ESOPs have been used in thousands of these situations to keep the business from being sold or closed. Moreover, not all of these companies have involved small family businesses. Wierton Steel in Wierton, West Virginia, for example, was a Fortune 500 company which had been totally closed down by its corporate parent because the corporate parent did not want to spend the money to buy the pollution control equipment necessary for the company to stay in business. An ESOP enabled this company to be reopened, and today Wierton Steel is one of the most profitable companies in the steel industry. Similarly, United Airlines was restructured to provide for a majority employee ownership, rather than face the prospect of bankruptcy. Clearly, neither of these buyouts would have been possible if the ESOP had not had the ability to leverage.

In summary, my third recommendation, as described above, is to secure legislation to enable ESOPs to be leveraged.

My fourth recommendation is that you should lobby to have ESOP buyouts afforded the same tax advantages that are enjoyed by leveraged buyouts and by corporate mergers and acquisitions. The laws of almost all countries, for example, provide for the tax deductibility of interest in the case of leveraged buyouts and in the case of corporate acquisitions. Both of these techniques, however, serve to concentrate ownership of capital. ESOP buyouts, on the other hand, serve to broaden the ownership of capital. Hence, in the case of an ESOP buyout, the tax law should provide for the deductibility of both interest and principal in order to facilitate the public policy of broadening the ownership of capital.

Similarly, the laws of almost all countries provide for tax-free mergers in the case of the corporate acquisition of one corporation by another corporation. Again, tax-free mergers result in the concentration of capital, whereas ESOP buyouts serve to broaden the ownership of capital. Accordingly, you should lobby to have these same techniques be available in the case of employee buyouts. Thus, for example, in the U.S., we have a tax-free rollover provision which gives the owner the same tax-free treatment in the case of a sale to an ESOP as he would have in the case of a tax-free merger with another company. Thus, my fourth recommendation is to lobby for tax-free rollover provisions which will allow ESOPs to compete with tax-free mergers and acquisitions.

I trust that these recommendations will be helpful to you in securing favorable ESOP legislation within your own countries.

Thank you for your attention.

John D. Menke

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