Friday, May 30, 2008

In Stock Plan, Employees See Stacked Deck

In Stock Plan, Employees See Stacked Deck

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Thousands of workers at U.S. Sugar thought they were getting a good deal when the company shelved their pension plan and gave them stock for their retirement instead. They had a heady sense of controlling their own destiny as they became the company’s biggest shareholders, Vic McCorvey, a former farm manager there, said.

“It was always stressed to me, as manager of that 20,000-acre farm, that the better you do, the higher your stock will be and the more retirement you could get,” Mr. McCorvey said. “That’s why I worked six and seven days a week, 14 hours a day,” slogging through wet and buggy cane fields, doing whatever it took.

Now that many U.S. Sugar workers are reaching retirement age, though, the company has been cashing them out of the retirement plan at a much lower price than they could have received. Unknown to them, an outside investor was offering to buy the company — and their shares — for far more. Longtime employees say they have lost out on tens of thousands of dollars each and millions of dollars as a group, while insiders of the company came out ahead.

Some former U.S. Sugar employees have since filed a lawsuit accusing company insiders of cheating them out of money that was rightfully theirs. Throughout, the worker-owners have been shut out of information about the company’s finances and unable to challenge management’s moves or vote because their shares were held through a retirement plan, not directly.

What has happened at U.S. Sugar could happen at many other companies because of a type of retirement plan that proliferated in the 1980s, after powerful members of Congress took an interest in “worker ownership” as a way to improve productivity.

Thousands of companies, large and small, embraced the ensuing tax benefits by creating employee stock ownership plans, known as ESOPs. U.S. Sugar, the largest American producer of cane sugar, took its stock off the public market in the transaction that created its ESOP, in 1983.

Nearly 95 percent of the country’s 10,000 ESOPs are now at privately held companies, like U.S. Sugar. Because their shares are not publicly traded, there is no market price. So workers cash out shares without knowing what the price would be on an open market.

The former employees accuse U.S. Sugar insiders — descendants of the industrialist Charles Stewart Mott — of scheming to enrich themselves by buying back workers’ shares on the cheap. They say “the principal actor” is William S. White, the company’s longtime chairman, who is married to Mr. Mott’s granddaughter. They also say he improperly exerted his influence as chairman of the Charles Stewart Mott Foundation, whose mission is to advance human rights and fight poverty and which holds a big stake in U.S. Sugar.

“They robbed us,” said Loretta Weeks, who worked in U.S. Sugar’s lab, testing sucrose levels in cane juice. “It’s like the last 15 years we were working for nothing.”

U.S. Sugar said in a statement that the lawsuit had no merit and that the company would vigorously contest it, but it did not respond to any specific accusations.

Through his lawyer, Mr. White denied that he had improperly exerted control over the U.S. Sugar board, or that the Mott Foundation had anything to do with the decision not to sell to the outside investor. The lawyer, H. Douglas Hinson, also said that Mr. White and the Mott Foundation had no role in deciding what price employees received for their stock, because the price was set in an independent appraisal.

Members of Congress tried to prevent disputes over the fair market value of shares in employee stock plans by requiring private companies to get independent appraisals each year. But workers at U.S. Sugar say the chairman and his allies withheld crucial information from the appraiser and artificially depressed the share price, something the chairman denies. The employees do not accuse the appraiser of wrongdoing.

Missed Opportunities

To document their claims, the former workers cite two offers to buy U.S. Sugar for $293 a share — offers that came as the workers were being cashed out of their shares by the company for as little as $194 a share. The worker-owners were not told about these outside offers and had no chance to tender their shares. They found out only through word of mouth, after the board of U.S. Sugar had rejected both offers.

As retiring workers cash out their shares, the company then retires their stock. That leaves fewer shares outstanding over time, the lawsuit says, allowing the insiders’ control of U.S. Sugar to grow, without their having to spend a penny buying stock. In this way, Mr. White’s immediate family increased its stake in U.S. Sugar by 19 percent from 2000 to 2005, the lawsuit says.

The Charles Stewart Mott Foundation issued a statement saying that as a major U.S. Sugar shareholder, it was confident that U.S. Sugar’s board had “acted responsibly and within its duties.” It also said the workers’ lawsuit contained accusations that were inaccurate.

While they wait for their lawsuit to inch through federal court, U.S. Sugar’s former employees say they are struggling to get by on fewer retirement dollars than they should have received. Many are former field workers, machine operators and mechanics, paid by the hour and living in one of Florida’s poorest counties. Some said the disputed stock plan was their sole retirement nest egg.

“I had to go back to work,” said Randy Smith, who retired last year after 25 years as a welder and machinist. He was only 55, but said U.S. Sugar had forced him to retire after declaring him no longer qualified to do his job. The company has been cutting staff aggressively for several years.

Mr. Smith said he cashed out of the retirement plan for about $90,000, but could have received about $53,000 more, if he had had the chance to tender his shares and the company had accepted the outside offers. The extra money would help a lot, he said, because his wife, Sandra, has rheumatoid arthritis, and after he retired, U.S. Sugar canceled its retiree health plan.

Mr. Smith has since found a new job, with health benefits — but it pays $10 an hour, compared with the $23 an hour he once earned at U.S. Sugar.

“My wife, she’s having to work two jobs just to make ends meet,” he said.

Mr. McCorvey said that he and his wife, Marilyn, also a former employee, have calculated that the outside offers would have been worth $137,000 more to them. He was laid off in 2004; an executive assistant, she was laid off in 2002.

Even though they no longer work at the company, they cannot cash out their stock, because of plan vesting rules, they said.

Meanwhile, the stock price has been falling, based on appraisals and cash-out values supplied by the company.

“I’m scared I’m going to lose it all,” Mr. McCorvey said.

Owners, but Excluded

To make matters worse, U.S. Sugar announced in April that it was eliminating its dividend. The McCorveys had been receiving dividends worth about $7,000 a year on their shares.

They and other former U.S. Sugar workers said they had planned to attend the company’s annual meeting this month, so they could tell management their complaints as shareholders.

But this year, for the first time, the company announced that employee-shareholders would not be allowed to attend the annual meeting. It said that they were not the shareholders of record, and that as a result they would be represented by the trustee of their plan, the U.S. Trust Company.

A spokeswoman for Bank of America, which owns U.S. Trust, said the company believed it had fulfilled all of its duties as the trustee.

Experts said it was unusual to bar participants in employee stock plans from shareholders’ meetings.

“It is legal,” said Loren Rodgers, project director for the National Center for Employee Ownership. But he cited research indicating that worker-owned companies tended to have better results when workers had a say in operations.

Mr. Rodgers said that Congress had decided to limit the workers’ powers as shareholders out of concern that companies might avoid the structure if workers received full rights.

Many former workers at U.S. Sugar acknowledged that they had never tried to attend an annual meeting until now. But that did not quell their anger at discovering they could not. “It was real nasty, the company to do us like they did us,” said Tommy Miller, who retired last fall after 32 years as a supervisor in a locomotive repair shop. He was only 56 but was caught in a mass layoff.

He said he cashed out his shares and invested in an individual retirement account, only to learn that a bidder had been willing to pay him a lot more.

“So you took my job and you took my stock, too,” Mr. Miller said.

The workers describe a harsh new face on a company once known as paternalistic. U.S. Sugar was bought out of bankruptcy during the Great Depression by Mr. Mott, an entrepreneur who said companies should strengthen the towns where they did business.

Mr. Mott, who started out making bicycle wheels and ended up with the largest single block of General Motors stock, created charities in Flint, Mich., and also provided Clewiston with swimming pools, libraries and a youth center.

“When somebody’s child got hurt or was seriously ill, the company would fly that child to a hospital in Tampa, or wherever they needed to go,” John Perry, a former mayor of Clewiston, said. “This was a wonderful, wonderful place to live.”

But that homey culture did not survive the tide of globalization. The North American Free Trade Agreement raised the prospect of a flood of cheap sugar from Mexico and other countries with low wages. U.S. Sugar scrambled to lower its costs.

Ellen Simms, U.S. Sugar’s former comptroller, said that when the company had to trim its payroll, it seemed to choose people with many years at the company.

“It was very obvious, with few exceptions, that they were targeting the employees who had been there the most time and who had the most ESOP shares,” she said. She resigned in protest in 2004.

Meanwhile, the falling stock price reported in the appraisals was a boon to the company, she said, because it made it cheaper to buy out the workers.

Conspicuous Offers

The reported declines in the stock price might not have been questioned, had it not been for two offers to acquire U.S. Sugar, one in the summer of 2005 and the other in early 2007. Both were made by the Lawrence Group, a large father-son agribusiness concern in Sikeston, Mo., for $293 a share in cash. Gaylon Lawrence Jr. confirmed the price but declined to comment further.

The worker-shareholders were being paid $205 to $194 a share at the time, based on ESOP appraisals.

But to help vet the Lawrence Group’s offer, U.S. Sugar hired a second appraisal firm to calculate the company’s breakup value. This appraiser came up with $2.5 billion, or about $1,273 a share.

U.S. Sugar then rejected the Lawrence Group’s offer as inadequate.

Mr. McCorvey said he would have tendered his shares to the Lawrence Group without a moment’s hesitation. “But we were never given the opportunity,” he said.

John Logue, an ESOP specialist at Kent State University, said federal law does not require worker-owners to vote on acquisition offers. But, he said, “when you’re in doubt, let the participants vote. We have kind of an innate sense in the United States that people are entitled to do what they want with the property they own.”

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