VEBA Ownership vs. Employee Ownership: The Chrysler and GM Proposed Restructuring

Last week it was announced that the United Auto Workers union (UAW) would eventually Get a 55% Stake in Chrysler for Concessions in a restructured Chrysler LLC:

The United Auto Workers union would eventually own 55% of the stock in a restructured Chrysler LLC under the deal reached by the union and the auto maker, according to a summary of the agreement that was reviewed by the Wall Street Journal.

Fiat SpA "eventually" will own 35%, and the U.S. government and Chrysler's secured lenders together will end up owning 10% of the company once it is reorganized, that summary said.

The summary was distributed Monday evening at a gathering of union leaders in Sterling Heights, Mich. The deal was first disclosed Sunday night. The UAW aims for Chrysler workers to vote Wednesday on the proposed agreement, which requires changes to the union's current Chrysler contract.

According to the summary, Chrysler will also issue a $4.59 billion note to the health-care trust fund that the union will manage for retired workers. The agreement said Chrysler will pay $300 million in cash into the trust fund in 2010 and 2011, and increasing amounts up to $823 million in the years 2019 to 2023.

The trust fund will own a "significant" amount of Chrysler stock and will be allowed to appoint a representative to Chrysler's board, the summary said.

Chrysler and Employee Ownership? notes that this is both good news and bad news for ESOPs and the employee ownership community:

Good news in that it shows a psychological and philosophical acceptance of employee ownership in some form as the desired outcome under certain circumstances.

Bad news in that it is not an ESOP. And, like many of the ownership schemes established in very distressed companies, the outlook is problematic for those companies.

ESOP advocates should not break out the champagne, just yet.

A voluntary employees' beneficiary association (VEBA), and not the employees, will hold the shares:

A voluntary employees' beneficiary association (VEBA) under Internal Revenue Code section 501(c)(9) is an organization organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries if no part of the net earnings of the association inures to the benefit of any private shareholder or individual.

The organization must meet the following requirements:

1. It must be a voluntary association of employees;

2. It must provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose; and

3. Its earnings may not inure to the benefit of any private individual or shareholder other than through the payment of benefits described in (2) above.

Membership of a section 501(c)(9) organization must consist of individuals who are employees who have an employment-related common bond. This common bond may be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. However, if the organization is part of a plan maintained under a collective bargaining agreement between employee representatives and employers, and such plan was the subject of good faith bargaining between such employee representatives and employers, the plan need not meet such nondiscrimination requirements for the organization to qualify as tax exempt

The U.S. Treasury, and not the VEBA, will get any profits from the sale of any shares.

UAW Says Won't Control Chrysler discusses how the union will not have control and could still act independently:

The United Auto Workers president is seeking to distance his union from direct responsibility for the future of Chrysler LLC, noting 55% of the auto maker will be owned by a retiree health care trust fund and not the union itself.

"It's this independent trust that will own these shares," UAW President Ron Gettelfinger said on the Fox Business Network Friday morning. Mr. Gettelfinger's office did not immediately respond to interview requests.

The trust--known as a Voluntary Employee Beneficiary Association, or VEBA--is supposed to take ownership of 55% of Chrysler as part of a government-brokered cost-cutting plan that union workers ratified earlier this week. Chrysler filed for federal bankruptcy protection Thursday.

Mr. Gettelfinger also implied in the Fox interview that the UAW would be able to act independently, even strike if necessary, despite the fact that the union would own a critical piece of the company through the VEBA trust.

"The VEBA is controlled by the outside independent directors who have been appointed by a judge to serve on that," he said. "We have less UAW representation on the VEBA. And as far as the board seat that the VEBA is going to get [on the Chrysler board] with the approval of the UAW, the voting will be done by independent directors….So, I don't see that conflict of interest issue."

At Chrysler and GM, It's Not Employee Ownership discusses the differences between this VEBA arrangement and a traditional employee stock ownership plan (ESOP):

So how does this compare to conventional employee ownership through an employee stock ownership plan (ESOP), broadly distributed stock options, or similar arrangements? Unlike participants in such plans, employees involved in one of these VEBA arrangements do not see personal gains or losses from the share price other than to the extent that if the shares do go down enough, the VEBA may not have sufficient funds for retiree health care programs. Many, and perhaps most, current employees may never benefit from these programs, which very well could be reduced or eliminated in the future if the companies do not recover quickly. If the stock does perform at all well, it will be sold as soon as it meets the VEBA obligation, providing no potential upside.

Second, in actual employee ownership plans, employees individually have ownership attributed to them; here, the ownership is held on a short-term basis by a trust associated with the UAW.

Finally, employee ownership is very rarely used in troubled companies, despite all the media attention to companies such as the Tribune Company and United Airlines. Well under one percent of all employee ownership plans are used this way. Plans are typically set up in healthy businesses as a way to provide an equity stake to employees and, in the case of ESOPs, very often to transfer ownership over time to employees in a way that does not require them to use their own money to buy shares.

Chrysler Workers Urge Obama to Support Ownership Push discusses how some current and former Chrysler workers are pushing for an employee purchase of Chrysler:

Ms. Mauder said she and others in her group oppose union ownership of the company. They see the tentative agreement with the UAW as handing the company over to UAW leadership rather than rank and file union members or non-UAW employees, she said.

"They're going to be the ones that have a vote, not the employees," said Ms. Mauder. "So it will be business as usual."

Ms. Mauder, a former UAW member from Toledo says those in favor of an employee purchase of Chrysler reorganized in recent months. The AAWOC has more than 200 active volunteers.

"We really want full ownership," she said. "We can have a new Detroit, not the same business as usual."

Ms. Mauder's effort is backed by civil rights icon Walter Fauntroy, a former congressman and advocate of employee stock ownership plans, or ESOPs.

We also discussed ESOPs and the Auto Industry Bailout earlier this year.