Morgan Lewis on ESOPs
September 2005

In this Issue:

• IRS Issues Proposed Regulations Denying Deduction for Redemption of Stock Held by an ESOP:
  On August 24, 2005, the IRS issued proposed regulations that confirm the IRS’s position that payments in redemption of stock held by an ESOP are not tax deductible. These proposed regulations are the IRS’s latest response to an issue that has been a subject of disagreement between the IRS and the Ninth Circuit Court of Appeals. The proposed regulations also provide guidance on deductions for dividends paid on securities which are not securities of the employer sponsoring the ESOP.
• A Growing Split Among Federal Courts on the Right of Participants in Individual Account Plans to Recover Losses from Fiduciary Breaches:
  Recent court decisions illustrate the growing split among federal courts on whether participants in individual account plans, such as Section 401(k) plans and ESOPs, can sue as a class on behalf of the plans to recover for fiduciary breaches when the breaches affect only certain accounts within the plans.
• The Delaware Chancery Court Rejects Disney Shareholders' Claims:
  On August 9, 2005, the Delaware Chancery Court rejected claims made by Disney’s shareholders that members of Disney’s board breached their fiduciary duties to shareholders in connection with the hiring and firing of Michael Ovitz one of the founders of the premier Hollywood talent agency, Creative Artists Agency at a cost of $140 million for his 14-month tenure at Disney.
• McKesson Revisited:
  On July 29, 2005, the U.S. District Court for the Northern District of California ruled that members of McKesson Corp.’s board of directors did not breach their fiduciary duties when they failed to divest the company’s ESOP of employer stock, despite the fact that they knew of accounting irregularities at the company’s merger partner. According to the decision, the board could not be liable for failing to diversify the plan out of company stock, because doing so would have violated insider trading laws.
• New SEC Rules May Benefit Public ESOP Companies:
  Public ESOP companies may benefit from new rules adopted by the Securities and Exchange Commission on June 29, 2005. The new rules make significant revisions to the registered offering framework under the Securities Act of 1933 and are intended to eliminate unnecessary and outmoded restrictions on registered offerings. The new rules will be most significant for a new category of large, already public companies that will be categorized as “well-known seasoned issuers” or “WKSIs.”
• Calendar of Events

For the full story, please view the PDF.