LEGAL NEWS PHOTO BY CYNTHIA PRICE
by Cynthia Price
Legal News
An Employee Stock Ownership Plan (or ESOP) benefits both company owners who want to transition their interests and the employees of the company.
“If you’re a C corp, selling to the ESOP allows a tax deferral election, and that’s often a driver of people’s behavior. But since employees also have an additional retirement benefit, studies bear out that retention rates are better. The employees recognize that the size of their retirement benefit is tied to the value of the company, so their performance does matter,” says Justin Stemple of Warner Norcross and Judd.
And Stemple should know. His practice is focused on ESOPs, and his expertise is vast in a fairly complicated field of counsel.
He recently brought that expertise to bear on establishing an ESOP for the well-known local company Crystal Flash, one of the state’s largest independent energy distributors.
The Fehsenfeld family has owned the company since 1932, when John Fehsenfeld started it in Indianapolis. Shortly afterwards, his son Frank moved the business to Grand Rapids, and many may remember the Crystal Flash gas stations around town.
Starting in the 1940s, however, the company began to focus on home heating, culminating in entering the propane business in the 1980s, and in 2002 Crystal Flash started selling off the retail stations and purchasing fuel companies.
As part of the family’s planned transition out of ownership, they hired Tom Olive as president in 2015.
Olive, who moved to the area in 2003 and was CEO of two previous local companies prior to joining Crystal Flash, commented, “I?had the privilege of walking into a fantastic team — a small community of professionals, be it legal or financial advisors or the trustees, who really are passionate about having their clients make their transition well. And we’ve been really lucky to work with a great team from Warner Norcross.”
In addition, Olive released a statement saying,“”It’s a testament to the family for its generosity and wisdom in creating this ESOP. The Fehsenfelds want to ensure that team members who have contributed
to building Crystal Flash can now build a secure financial future for
themselves and their families as a direct result of their efforts to grow the business.
“
”As always, our goal is to provide customers with reliable and high-quality service. We believe an ESOP puts us in the best position to continue that commitment...”
The company determined that an ESOP would be the best way not only to honor the 250 employees’ contributions, but also to continue the cultural legacy of being a great place to work.
The credit for “inventing” the ESOP usually goes to a lawyer and investment banker named Kelso in the mid-1950s, but it was not until Sen. Russell Long, who chaired the U.S. Senate’s Finance Committee, took an interest that the plans became law. At the same time, concerns about increased future demands on the Social Security system resulted in the 1974 passage of ERISA (Employee Retirement Income Security Act).
As of 2014, 7,000 companies had ESOPs, covering 13.5 million employees. That figure was actually a reduction from the 1990s, probably resulting from the introduction of 401(k) plans.
As with Crystal Flash, many companies establishing ESOPs continue to offer 401(k) plans, and historically there is rarely a decrease in other forms of employee compensation either.
Stemple notes that there are a number of structural models associated with ESOPs, and it is a commonly held misconception that it is always paired with some kind of participative employee management scheme. “In the ESOP the employee is a single shareholder; if there’s a vote for something that shareholders have to vote on, like a merger, or a sale of substantially all your assets, or dissolution, then they vote on it. But on a general on-going basis, the board of directors sets the strategy like in other companies,” he explains, which will be the case with Crystal Flash.
He also emphasizes that there are a lot of rules and constraints in ERISA (the Employee Retirement Security Act of 1974) which require diligence at all points in setting up the ESOP.
That is why Stemple plays an active role in professional organizations that increase his expertise. In addition to membership in the National Center for Employee Ownership (the source for some of the information above), Stemple has been active for several years in the Michigan chapter of the ESOP Association of America. He currently serves as Vice President — Programs.
“The ESOP Association is the national trade group non-profit designed to encourage employee ownership in ESOP companies,” Stemple says. “The Michigan Chapter executive committee plans Michigan events and helps support practitioners. We do a spring and occasionally a fall conference in Lansing; this year we’re joining with Ohio, Indiana, and Kentucky for the Great Lakes ESOP conference.”
Stemple received his J.D. from William and Mary College after getting a B.A. magna cum laude from Alma College.
His practice, which includes work in the craft brewery industry, focuses on executive compensation, incentive programs, and equity compensation. “I strive to communicate... complex rules to my clients in ways that are easy to understand and apply practically,” he says on the Warner Norcross website.
Named a Michigan Super Lawyer Rising Star from 2012 to 2015 and as a Best Lawyer in America, Employee Benefits (ERISA) Law from 2013 to the present, Stemple also finds time to raise three children, one of whom is adopted, with adoption of a fourth child from Ethiopia pending.
“I’ll be there for a couple weeks, but my wife will probably be there four or five weeks. Unfortunately, I just can’t do it,” he says. The family lives in Caledonia.
Warner Norcross attorney Vern Saper, who has been Of Counsel since 2014, mentored Stemple well. “I’m very thankful for Vern, who’s been doing ESOP work since the 1970s. His name is well-known in the ESOP community.” he says.
Stemple is also willing to share his ESOP and retirement plan expertise broadly, through publications, an aggressive speaking schedule, and serving as an adjunct faculty member for Western Michigan University’s Certified Employee Benefits Specialist Program and at Grand Valley State University’s Seidman College of Business.
He acknowledges that “All the vesting rules and the allocations, and more, make ESOPs difficult to manage, so most companies hire a third party to do it.
“The 2008 Great Recession really slowed ESOPs down,” he adds. “First, financing was hard to get, second business valuations were depressed, and also business owners were worried about survival, not transition. But as the economy has picked up all three of those have changed completely, so ESOPs seem to be on the increase.”
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