Tuesday, January 6, 2009

Ford's ESOP Problems are Beginning to Look a lot like the Tribune Co.'s ESOP Problems

By Paul Kiesel

Just before the end of last year, Ford Motor Company moved to dismiss a case brought by participants of Ford's employee stock ownership plan (ESOP) on the ground that participants failed to state a viable claim for relief. Participants claim that the ESOP's investments in Ford company stock were imprudent.

U.S. District Judge Stephen J. Murphy favored the argument made by the ESOP participants. He noted in his opinion that "while ERISA does provide an exemption from diversification rules for ESOPs, it does so while still requiring that the plan sponsor act with prudence when investing in company stock."

Ford had tried arguing that it did not commit a fiduciary breach by continuing to invest in Ford stock because, during the class period, Ford stated that it was not facing "imminent collapse."

The Tribune Company has tried arguing the same thing, however, through mouthpieces in the media and not yet in court. The Tribune Company and Sam Zell have stated that it did not foresee the problems it ran into in 2008 (declining ad revenue, mass layoffs, etc.), but would that have really prevented Mr. Zell from leveraging the purchase of the Tribune Co. with the employee stock ownership plan, if he had this information or even a crystal ball, in late 2007?

In both instances, Ford and Tribune face a massive debt burden and it will be surprising if both make it out the current financial crisis intact (it is probably that both Ford and the Tribune Co. will have to sell of many assets, in order to stay afloat in 2009). Both companies' ESOPs are likely to be "wiped out," and the way the ESOPs were being invested or used was only prudent to a minority of employees (Ford executive compensation, Sam Zell, etc.), who were likely to gain large profits if the Ford and Tribune excelled after implementing their new financial strategies or take minimal losses if the deals being brokered fell flat.

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