Employee-Owned Companies Trust Trump to Issue Long-Awaited Rule

Employee-owned US companies see an opening under the Trump administration for long-awaited deregulatory guidance to shield them from agency scrutiny and class actions they say restrict their ability to form and operate.

The US Labor Department’s workplace benefits agency can now revamp a Biden proposed rule on employee stock ownership plans that President Donald Trump iced on Inauguration Day.

The DOL’s regulatory work appears stalled as Elon Musk’s team makes sharp federal agency cuts. But ESOP industry advocates remain hopeful the Trump administration will rewrite the proposal to relax regulatory burdens on employee-owned firms, especially since its nominee to lead the Employee Benefits Security Administration seems to agree with that aim.

The employee ownership industry has long complained of costly lawsuits and federal investigations targeting the valuation of the stock company executives award their workers. But employee-stock ownership plan advocates say political headwinds have now finally shifted in their direction, after waiting some 37 years since the government made its first-ever proposal to set minimum parameters for their stock transactions.

“The Trump administration is wanting to engage with us—the ESOP community—about these rules,” said Loren Rodgers, executive director of the National Center for Employee Ownership. “That’s been the positive development we’ve seen; there has been a clear and explicit request for dialogue.”

ESOPs set up as an employee benefit plan are by far the most common method for transferring ownership from a small group of owners to the workers at a company, as was done at firms like Publix Super Markets Inc. and WinCo Foods Inc. There are roughly 6,500 ESOPs with assets exceeding $1.8 trillion and nearly 15 million workers nationwide, according to the NCEO.

Second Attempt

Former President Joe Biden issued his proposal along with a corresponding Employee Retirement Income Security Act prohibited transaction exemption during his final days in office, complying with a landmark 2022 retirement law that required rulemaking on ESOPs.

The proposal defined the “adequate consideration” ESOPs give proposed stock valuations, but got caught in Trump’s sweeping Jan. 20 executive order that paused outstanding Biden regulatory guidance. Days later, Trump withdrew the proposal and scrubbed it from the Federal Register.

Although ESOPs eagerly anticipated an adequate consideration rule, the Biden proposal wasn’t it, said James Bonham, president and CEO of the ESOP Association.

Regulators emphasized the accuracy of an ESOP trustee’s valuation rather than the good-faith process they employed to reach it, setting trustees up for failure, he said. That’s precisely what Bonham posits led to a marked upswing in the number of private-sector lawsuits challenging ESOP valuations in the absence of formal DOL guidance.

It’s also what made ESOPs the target of a national EBSA enforcement priority area. ESOP transactions are inherently conflicted trades, since they force executives to negotiate with an employee benefit plan of their own making. Former EBSA officials under Biden have said those qualities make the plans prone to abuse and deserving of more regulatory scrutiny.

But the “one-two punch” of private-sector and federal civil suits has chilled ESOP uptake, said Rodgers. The number of new ESOPs created each year has dwindled to between 200 and 300, representing less than 1% of all US mergers and acquisitions.

“We think that the Biden administration completely missed the mark with their proposal,” said Bonham. “It was a reflection of the bias that career employees at EBSA have had against ESOPs and a gift to the plaintiffs’ bar and their nuisance lawsuits. It set up a standard that not a single ESOP in the country could meet.”

Bad Omens

The SECURE 2.0 Act Congress passed in late 2022 required EBSA to define “adequate consideration” as companies floundered under an uptick in civil litigation. ESOPs typically enjoy bipartisan support, and a 1988 proposed regulation had never been finalized, leaving a gap for Congress to fill.

Now that the Biden-era proposal is shelved, the Trump administration is still held to that same SECURE 2.0 mandate, said Allison Wilkerson, a McDermott Will & Emery LLP partner in Dallas.

Yet, Congress failed to put a timeline on the project, and the executive order that doomed the Biden-era proposal also stipulates that new regulations may only be issued after a significant number of others are retired or pulled back. Advocates are hopeful for an exemption in the case of ESOPs.

“Given the mandate, I am hopeful that restriction does not apply here to limit the Trump administration from proceeding with issuing a workable, process-based regulation in this area,” Wilkerson said.

The Department of Government Effiency’s federal agency cost-cutting spree could also slow both regulatory and deregulatory progress. At DOL, DOGE has slashed contracts and eliminated leases, and further staff layoffs are expected soon.

The administration’s revised employee ownership policy agenda already hit a DOGE-related kerfuffle when the head of EBSA’s brand-new Employee Ownership Division got fired due to her probationary employee status in an early wave layoffs. Hillary Abel has been rehired, according to the ESOP Association, but the hiccup cast a shadow over the administration’s intentions.

Business groups that represent ESOPs insistthe Trump administration is signaling a change of heart, starting with their willingness to engage in an open dialogue with topics including the adequate consideration rule.

Trump’s nominee to head EBSA Daniel Aronowitz, president of ENCORE Fiduciary, made his career out of insuring health and retirement plans against fiduciary legal liability. He’s become a vocal critic of what he calls “regulation through litigation.”

“Far from helping plan participants, the valuation challenges have limited the number of new ESOPs,” Aronowitz wrote in a 2023 blog post. “ESOPs are one of the best ways for employees to gain ownership stakes in companies. But this avenue to ownership is severely diminished because most ESOPs never get started—all because of the litigation threat.”