Your company sets up an employee stock ownership plan and tells you -- loudly and repeatedly -- that now you too are an owner. But you look at your account in your ESOP, or your stock option waiting to vest, and you think "I'm not really an owner like other owners are. They have rights -- I don't." Yet your company says you're an owner. Who's right?
In a way, you both are. The problem is that "ownership" is not an either/or concept. There are different rights of ownership, and what you get often depends on what you have put up to get it. These different rights are explored below.
The right to sell your shares.If you own shares directly, you can generally sell them whenever you can find a willing buyer. For employee owners, when you can sell your shares depends on what your plan allows. In ESOPs, it is usually when an employee leaves the company that the shares can be sold; with options, shares can usually be sold immediately after vested options areexercised (that is, as soon as you buy the shares, youcan sell them). Regardless of when you can sell,however, for all the time you are in the ESOP orhold options, you get the same increase in value that other owners get on their shares.
The right to dividends.While owners are waiting to sell their shares, theymay get a financial benefit in the meantime in theform of dividends. These are payments from company profits based on how many shares you own. Many public companies pay dividends, but many do not, and few privately held companies do. That's because dividends are usually taxed both to thecompany and the shareholder. It's usually better to keep the money in the company to help share value grow.
In an ESOP, however, companies can take a tax deduction for dividends paid to participants or used to repay an ESOP loan. So some ESOP companies do pay dividends. If they pay dividends to anyone, in fact, the ESOP must get dividends too. With options, however, employees do not receive dividends because they do not actually own the shares yet.
Employees get dividends only if they exercise the options, hold onto the shares, and the company pays dividends.
The right to information.If you buy shares in a company, you will get an annual report or other statement of the company's financial condition. If you participate in ownership through your company's ownership plan, however, you may not get the information. In an ESOP, the trustee of the plan is the legal owner of the shares and must get whatever information other shareholders gets. Most ESOP and some option companies, however, voluntarily pass along at leastsome financial information to employees.
The right to vote.If you own stock, shouldn't you be able to vote it? Ifyou buy shares directly, you usually can, unless youhave purchased nonvoting shares (many companiesoffer such shares, often with other rights to compensate). In an ESOP, you must be able to vote your shares on some issues, but on others, such as who is on the board, the company can decide whether you can vote or the trustee will vote for you.
With options, you cannot vote the shares until you have purchased them.
Other rights.The most important of the special rights that shareholders have in most states is that if the company is sold, all shareholders owning the same class of stock get thesame price. This applies as well to any sharesowned through an ESOP or options that (as in many plans) vest on sale.
So why are my rights more limited?It seems that as an employee owner, you just don't have the same rights as other owners. That's true. But it is also true that the other owners used their own money, almost always after they paid taxes on it, to buy the shares at their full price. As an ESOP participant, the shares were contributed to your account, and you have no tax consequences on the contribution until you get the shares later. With options, you have the right eventually to buy shares at what is often a considerable discount.
In both cases, ownership is being provided as an employment benefit. In effect, you are buying the shares through your work at the company. The terms of the sale are such that you earn the shares over a period of time. Once you take possession of them (when you leave the ESOP or exercise your options), you have the same rights as any other owner. In the meantime, you have the most important owner's rightof all -- the right to the increase in the company's value. If you had to pay for all the rights mentioned above, it would be this one that would command the lion's share of your investment.