Daily Rules, Proposed Rules, and Notices of the Federal Government
Notice of the proposed exemptions will be provided to all interested persons in the manner agreed upon by the applicant and the Department within 15 days of the date of publication in the
The proposed exemptions were requested in applications filed pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Secretary of Labor. Therefore, these notices of proposed exemption are issued solely by the Department.
The applications contain representations with regard to the proposed exemptions which are summarized below. Interested persons are referred to the applications on file with the Department for a complete statement of the facts and representations.
The Department is considering granting an exemption under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
If the proposed exemption is granted, effective March 2, 2009, the restrictions of sections 406(a)(1)(A) and 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and 407(a)(1)(A) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) and 4975(c)(1)(E) of the Code,
(1) To the acquisition of certain rights (the ADS Rights) by the Plan in connection with an offering (the Offering) of shares of stock (the Stock) in HSBC Holding, plc (Holdings) by Holdings, a party in interest with respect to the Plan,
(2) To the holding of the ADS Rights received by the Plan during the subscription period of the Offering; provided that the conditions as set forth in section II of this proposed exemption were satisfied;
The relief provided in this exemption is conditioned upon adherence to the material facts and representations described, herein, and as set forth in the application file and upon compliance with the conditions, as set forth in this proposed exemption.
(1) The receipt by the Plan of the ADS Rights occurred in connection with the Offering made available by Holdings on the same terms to all shareholders, such as the Plan, of American Depository Shares
(2) The acquisition of the ADS Rights by the Plan resulted from an independent act of Holdings, as a corporate entity, and all holders of the ADS Rights, including the Plan, were treated in the same manner with respect to the acquisition of such rights;
(3) All holders of the ADS Rights, such as the Plan, received the same proportionate number of such rights based on the number of HSBC ADS held; and
(4) All decisions regarding the ADS Rights made by the Plan were made by an independent, qualified fiduciary (the I/F) which:
(a) Conducted a due diligence review of the Offering;
(b) Determined whether or not to direct the Plan to vote in favor of the Offering; and
(c) Evaluated a prudent strategy for disposition of the ADS Rights under the Offering that were allocated to the Plan.
1. The Plan is a defined contribution profit sharing plan, for eligible employees of HSBC North America Holdings, Inc. (the Employer) and its subsidiaries.
The Plan is qualified under section 401(a) of the Code. In addition, the Plan contains a cash or deferred arrangement intended to qualify under section 401(k) of the Code.
The Plan received a favorable determination letter, dated November 14, 2008, from the Internal Revenue Service. Although the Plan has been amended since applying for the determination letter, the Plan administrator and counsel for the Plan believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Code.
As of September 30, 2009, the Plan had approximately 44,000 participants. The fair market value of the total assets of the Plan, as of September 30, 2009, was $2.4 billion.
2. The Plan provides for participant directed investment of contributions made to the Plan. Participants in the Plan may choose among investment options, including mutual funds managed by subsidiaries of the Employer and managed by Vanguard Fiduciary Trust Co. (Vanguard). Vanguard is the trustee of HSBC-North American (U.S.) Tax Reduction Investment Trust (the Trust) which holds the assets of the Plan. In addition, the Vanguard Group of Investment Companies is the record-keeper of the Plan.
3. The application was filed on behalf of the Employer, a financial services company, which sponsors the Plan. The Employer, as an employer any of whose employees are covered by the Plan, is a party in interest with respect to the Plan, pursuant to section 3(14)(C) of the Act.
It is represented that the Employer neither had nor exercised discretionary authority with respect to the ADS Rights acquired by the Plan pursuant to the Offering, and therefore, was not acting as fiduciary, as defined in section 3(21) of the Act. An administrative committee (the Committee) is the named fiduciary of the Plan with respect to daily administration of the Plan. The Committee, as a fiduciary of the Plan, is a party in interest with respect to the Plan, pursuant to section (3)(14)(A) of the Act.
4. The Employer is a subsidiary of Holdings, a public limited liability company incorporated in England and Wales with operations worldwide. The Employer comprises all of the business interests of Holdings in the United States. As the parent of the Employer which sponsors the Plan, Holdings is a party in interest with respect to the Plan, pursuant to section 3(14)(E)of the Act.
5. Holdings is the ultimate parent of the HSBC Group. The HSBC Group is not a separate legal entity, but rather the term, HSBC Group, is an informal collective reference to the legal entities wholly or partially owned by Holdings in Europe, Hong Kong, Asia Pacific, the Middle East, North America, and Latin America. The HSBC Group is not publicly traded on the London Stock Exchange (LSE) or any other stock exchange.
6. The Stock of Holdings is traded on the LSE under the symbol HSBA. The Stock of Holdings is also traded on stock exchanges in Hong Kong, Paris, and Bermuda.
In the United States, shares of HSBC ADS (each representing five (5) shares of the Stock of Holdings) are traded on the New York Stock Exchange (NYSE) under the symbol HBS. BNY Mellon, Inc. (BNY Mellon) is the depository bank that holds the Stock of Holdings in a custodial account and issues shares of HSBC ADS to investors in the United States.
7. The shares of HSBC ADS are a permitted investment option under the terms of the Plan. In this regard, although employee contributions, as of March 28, 2003, may no longer be directed into the acquisition of shares of HSBC ADS, any shares of HSBC ADS acquired prior to March 28, 2003, may continue to be held in participant accounts in the Plan.
The aggregate fair market value of the assets of the Plan invested in shares of HSBC ADS, as reflected in the Plan's most recent annual report dated, December 31, 2008, is $98,679,000. The approximate percentage of the fair market value of the Plan's total assets, as of December 31, 2008, that is represented by investments in shares of HSBC ADS is 4.9 percent (4.9%).
8. On March 2, 2009, Holdings announced its decision, as a corporate entity and issuer of securities, to issue, in connection with the Offering, up to 5,060,239,065 shares of Stock in the form of new ordinary shares, representing approximately 41.7 percent (41.7%) of the existing issued ordinary shares of Stock of Holdings, as of February 27, 2009, the last business day prior to the announcement of the Offering. It is represented that Holdings made this decision for the sole purpose of raising additional capital. An aggregate of 4,887,538,091 new ordinary shares of the Stock of Holdings were subscribed for in connection with the Offering. The gross proceeds from such subscriptions in connection with the Offering totaled £12,072,952,215.50.
Completion of the Offering was conditional upon approval from the shareholders of the Stock of Holdings and upon approval from the shareholders of the HSBC ADS, such as the Plan. The Offering was approved in a meeting (the General Meeting) held in London on March 19, 2009.
9. Under the terms of the Offering, all shareholders of the Stock of Holdings received certain rights (the Share Rights) to purchase, through the exercise of such Share Rights, the new ordinary shares of the Stock of Holdings being issued by Holdings in connection with the Offering. With respect to the Share Rights, under the terms of the Offering, five (5) Share Rights were issued for every twelve (12) shares of the Stock of Holdings, rounded down to the nearest whole number, held by each shareholder on March 13, 2009, (the Record Date). Each of the Share Rights permitted a shareholder of the Stock of Holdings to purchase one (1) additional share of such stock at 254 pence per share.
In addition, under the terms of the Offering, all shareholders of the HSBC ADS, such as the Plan, received ADS Rights to purchase HSBC ADS. With respect to the ADS Rights, under the terms of the Offering, five (5) ADS Rights were issued for every twelve (12) shares of the HSBC ADS, rounded down to nearest whole number, held by each holder of such shares, including the Plan, on the Record Date. Each of the ADS Rights permitted a holder, such as the Plan, to purchase one (1) additional share of the HSBC ADS for an estimated price of $17.75 per each share.
As of March 13, 2009, the Record Date, the Plan held 2,067,667 shares of the HSBC ADS
10. It is represented that there was no market for the ADS Rights acquired by the Plan, because the terms of the Offering stipulated that the ADS Rights were not transferrable and would not be admitted to trading on the NYSE or any other stock exchange. In order to sell the ADS Rights, holders of the ADS Rights, such as the Plan, had to convert their ADS Rights into Share Rights. The conversion ratio between the ADS Rights and the Share Rights was one to five (1:5). Therefore, it is represented that underlying the 861,527 ADS Rights acquired by the Plan in the Offering that there were 4,307,639 Share Rights.
11. A market for the Share Rights did develop, and the Share Rights were listed on the LSE. In this regard, the Shares Rights began trading on the LSE on March 20, 2009, at 8 a.m. GMT.
12. The Offering closed on March 31, 2009, at 5 p.m. EST with respect to the ADS Rights. The Offering closed on April 3, 2009, at 11 a.m. BST with respect to the Share Rights. Pursuant to the terms of the Offering all unexercised rights expired and became worthless after the closing of the Offering.
13. To avoid engaging in a prohibited transaction, it is represented that the Plan considered whether or not to accept the ADS Rights. In this regard, the ADS Rights were accepted, because refusing to accept such rights might constitute a breach of the Employer's fiduciary duties to the Plan and to its participants and beneficiaries.
14. Although the Plan provides for participant directed investment, the applicant represents that it was not practicable to initiate and implement a participant level “pass through” voting during the proxy vote for the General Meeting, relating to the approval of the Offering, nor was it practicable to initiate and implement a participant level “pass through” of the exercise or sale of the ADS Rights, due to the short duration of time between when such rights were acquired by the Plan and when such rights expired under the terms of the Offering.
On March 12, 2009, the Employer first contacted U.S. Trust, Bank of America Private Wealth Management, acting on behalf of Bank of America, National Association (BANA),
15. BANA had sole authority to vote the shares of the HSBC ADS held under the Plan and to direct Vanguard to exercise or otherwise dispose of the ADS Rights acquired and held by the Trust, pursuant to the Offering. Specifically, BANA was responsible for: (i) Conducting a due diligence review of the Offering; (ii) determining whether or not to direct the Committee to vote in favor of the Offering at the General Meeting; and (iii) if the Offering were approved at the General Meeting to prudently evaluate a disposition strategy under the Offering for the ADS Rights that were allocated to the Plan.
With regard to the responsibility of BANA to instruct Vanguard, the Trustee of the Trust, on how to vote at the General Meeting held on March 19, 2009, it is represented that BANA performed an independent financial analysis of Holdings to determine the need for additional capital and the potential benefits of additional capital. BANA determined that Holdings appeared to be adequately capitalized, and that Holdings had taken steps to restructure its operations to better position itself for the future, in light of recent turmoil across a wide range of markets and industries, and in particular the financial services industry. Accordingly, it is represented that on March 16, 2009, BANA instructed Vanguard to vote the Plan's shares of the HSBC ADS in favor of the Offering at the General Meeting.
It is represented that on March 20, 2009, the participants and beneficiaries in the Plan whose accounts held shares of the HSBC ADS received their
As stated in the HSBC Rights Issue Prospectus (the Prospectus), issued by Holdings on March 17, 2009, shareholders of the HSBC ADS, including the Plan, were permitted to elect among the following three (3) options: (a) Exercise all or part of the ADS Rights for the purchase of shares of the HSBC ADS; (b) direct BNY Mellon to sell the Share Rights underlying the ADS Rights; (c) surrender the ADS Rights and receive Share Rights.
Under this option, a holder of the ADS Rights, including the Plan, could exercise all or only a part of the ADS Rights acquired in conjunction with the Offering and could purchase shares of HSBC ADS. In order to exercise the ADS Rights, a holder, such as the Plan, would have to deposit 110% of the subscription price for the HSBC ADS upon the exercise of each of the ADS Rights. The additional amount over and above the subscription price for the HSBC ADS was to increase the likelihood that the agent would have sufficient funds to pay the final subscription price for the HSBC ADS in light of a possible appreciation of Pounds Sterling against the U.S. dollar between the instruction date and the end of the subscription period, and to pay applicable United Kingdom stamp duty reserve taxes, and to pay any currency conversion expenses. It is represented that BANA understood that the Plan lacked available unallocated funds needed to exercise all of the ADS Rights.
The Plan could surrender a portion of the ADS Rights to BNY Mellon and direct BNY Mellon to sell the Share Rights underlying such ADS Rights, in order for the Plan to raise sufficient funds to exercise its remaining ADS Rights. According to BANA, this transaction would have resulted in the Plan receiving Pounds Sterling from the sale of the Share Rights, which would then have had to be converted back into U.S. dollars in order for the Plan to purchase shares of the HSBC ADS through the exercise of the remaining ADS Rights. The conversion from Pounds Sterling to U.S. dollars would have had to have been executed at the then-prevailing exchange rate. In the opinion of BANA, given the volatility in the foreign exchange markets and the uncertainty in future exchange rates, there was no guarantee that the Plan would have been able to convert the proceeds from the sale of the Share Rights into sufficient funds to exercise the remaining ADS Rights. If the Plan had received insufficient funds to exercise the remaining ADS Rights, such rights would have been deemed to have been declined and would have lapsed. Accordingly, for the reasons summarized above, BANA determined that the Plan would not select Option (A).
Under this option, HSBC established a process by which a holder of ADS Rights, including the Plan, could elect to liquidate such ADS Rights by directing BNY Mellon to attempt to sell the underlying Share Rights on the LSE. Unlike Option (A) above, under Option (B), the Plan was not required to deposit any funds in order for BNY Mellon to liquidate the Plan's ADS Rights. Further, it is represented that BNY Mellon, as depository and as a premier trading firm that was familiar with the transaction, had appropriate trading accounts already in place to facilitate the trading, had the expertise and the processes in place to sell the Share Rights underlying the ADS Rights within the permitted time period. Notwithstanding the fact that there was some currency risk from the conversion of Pounds Sterling into U.S. dollars, according to the I/F, Option (B), offered the Plan an expedited, low cost, frictionless way to liquidate the Plan's interests in the ADS Rights. In this regard, it is represented that under Option (B), the Plan did not have to pay any brokerage commissions in
Under this option, a holder of ADS Rights, including the Plan, could elect to exchange such rights for the underlying Share Rights and to sell such Share Rights or exercise such Share Rights to purchase the Stock of Holdings on the LSE. To do so, the Plan would have had to direct BNY Mellon to cancel the ADS Rights and to deliver the underlying Share Rights to a brokerage account set up by the Plan at a firm in the United Kingdom that trades on the LSE. To surrender the ADS Rights and receive the underlying Share Rights, the Plan would have had to pay a 1.5% stamp tax. Finally, the Plan would have had to direct the broker to sell all of the Share Rights, or to exercise all of the Share Rights, or to sell sufficient Share Rights to generate the funds needed to exercise the Plan's remaining Share Rights. To sell and/or exercise the Share Rights through a broker selected by BANA on behalf of the Plan, BANA would have had to negotiate the brokerage fees and other expenses that the Plan would have had to pay such broker for the sale and/or exercise of the Share Rights. Additionally, the Plan would have had to assume the risks and responsibilities attendant to the Share Rights, including effecting the exercise or sale of such rights.
According to BANA, Option (C) presented a number of issues to the Plan that could have resulted in higher trading costs. As there was no market for the ADS Rights, the sale of such rights required conversion into the underlying Share Rights. The conversion of the ADS Rights and receipt of Share Rights would have required the Plan, rather than BNY Mellon, to sell the Share Rights and to receive the proceeds denominated in Pounds Sterling. In addition, the Plan would have had to effect a foreign exchange conversion at the then-prevailing exchange rate, repatriate the funds back into the U.S. (possibly paying any applicable taxes), and then either deposit the proceeds in participant accounts or use the proceeds to purchase shares of HSBC ADS on the NYSE. Furthermore, the Plan would have had to pay wire fees to move the proceeds back to the U.S. BANA points out that during this process, the share price of both the Stock of Holdings on the LSE and the share price of the HSBC ADS on the NYSE would be fluctuating and could possibly have moved against the Plan. Accordingly, BANA determined that the uncertainty of the stock markets and the foreign exchange markets, along with the costs associated with executing the different trades and repatriating the funds back to the U.S. and the uncertainty related to trade settlement and execution, might have resulted in higher trading costs to the Plan, and therefore, lower proceeds to Plan participants. For the foregoing reasons, BANA determined that Option (C) was not in the interest of the Plan.
The applicant provided the following chart which compares the three (3) options, discussed above, and assesses the risks associated with each of the three (3) options:
Accordingly, it is represented that for the reasons cited above, on March 23, 2009, BANA chose Option (B), above, and instructed Vanguard, as Trustee, in turn to instruct BNY Mellon, as depository agent, to liquidate the entire position of ADS Rights
It is represented that the proceeds from the transactions were distributed, after accounting for the ADS depository's fees paid to BNY Mellon of
With regard to expenses, in addition to the ADS depository fees, the Plan paid foreign exchange charges incurred by BNY Mellon with respect to the conversion of Pounds Sterling to U.S. dollars. It is represented that on March 27, 2009, 1.4554 was the foreign exchange rate for converting Pounds Sterling to U. S. dollars. It is represented that this rate was obtained from OANDA
16. The Employer has requested an exemption with respect to the transactions which are the subject of this proposed exemption. In this regard, relief has been requested: (a) for the acquisition of the ADS Rights by the Plan in connection with the Offering by Holdings, and (b) for the holding of the ADS Rights by the Plan during the subscription period of the Offering. It is represented that the ADS Rights acquired by the Plan satisfy the definition of “employer securities,” pursuant to section 407(d)(1) of the Act, but do not meet the definition of “qualifying employer securities,” as set forth in section 407(d)(5) of the Act. Accordingly, the subject transactions constitute an acquisition and holding on behalf of a plan, of an employer security in violation of section 407(a) of the Act, for which the applicant has requested relief from sections 406(a)(1)(A) and 406(a)(1)(E), 406(a)(2), and 407(a)(1)(A). The subject transactions also raise conflict of interest issues by fiduciaries of the Plan for which relief from the prohibitions of 406(b)(1) and 406(b)(2) of the Act is needed.
17. It is represented that the subject transactions have already been consummated. In this regard, the Plan acquired the ADS Rights pursuant to the Offering on March 20, 2009, and held such rights pending the liquidation of such rights. It is represented that there was insufficient time between the date the Plan acquired the ADS Rights and the date such rights expired, to apply for and be granted an exemption. Accordingly, the Employer is seeking a retroactive exemption to be granted, effective as of March 2, 2009, the date that Holdings announced the Offering.
18. The applicant represents that the proposed exemption is feasible. In this regard, it is represented that the subject transactions are customary for the industry involved, as evidenced by the fact that the Department has granted individual administrative exemptions under similar circumstances. Further, the Employer bore the costs of the application for exemption, and the cost of the fee payable to BANA, and will bear the cost of notifying interested persons of the publication of the proposed exemption.
19. The applicant represents that the transactions which are the subject of this proposed exemption are in the interest of the Plan, because if the Plan had not participated in the Offering, those participants and beneficiaries whose accounts were invested in shares of HSBC ADS on the Record Date would not have received the benefit received by all other shareholders of the Stock of Holdings and shareholders of HSBC ADS.
20. The applicant represents that the proposed exemption provides sufficient safeguards for the protection of the Plan and its participants and beneficiaries. In this regard, the interests of the participants and beneficiaries of the Plan were independently represented at all times during the subject transactions by BANA. Further, BANA concluded that the most prudent course of action that the Plan could take with respect to the disposition of the ADS Rights and the course of action that was in the best interest of the affected participants and beneficiaries was to liquidate the ADS Rights under Option (B). Further, it is represented that the report prepared by BANA confirms that the subject transactions were administrative feasible, in the interest of, and protective of the rights of the Plan and its participants and beneficiaries.
21. In summary, the applicant represents that the subject transactions satisfy the statutory criteria of section 408(a) of the Act and section 4975(c)(2) of the Code because:
(a) The receipt by the Plan of the ADS Rights occurred in connection with the Offering made available by Holdings on the same terms to all shareholders of the HSBC ADS, including the Plan;
(b) The acquisition of the ADS Rights by the Plan resulted from an independent act of Holdings as a corporate entity, and all holders of the ADS Rights, including the Plan, were treated in the same manner with respect to the acquisition of such rights;
(c) All shareholders of HSBC ADS, such as the Plan, received the same proportionate number of ADS Rights based on the number of shares of HSBC ADS held; and
(d) All decisions regarding the disposition of the ADS Rights made on behalf of the Plan were made by BANA, acting as the I/F.
The persons who may be interested in the publication in the
It is represented that each of these classes of interested persons will be notified of the publication of the Notice by first class mail, within fifteen (15) days of publication of the Notice in the
All written comments and/or requests for a hearing must be received by the Department from interested persons within 45 days of the publication of this proposed exemption in the
Ms. Angelena C. Le Blanc of the Department, telephone (202) 693-8540. (This is not a toll-free number.)
Sammons Enterprises, Inc. Employee Stock Ownership ESOP, (the ESOP), Located in Dallas, Texas, Application No. D-11679].
The Department of Labor (the Department) is considering granting an exemption under the authority of section 408(a) of the Act in accordance with procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the proposed exemption is granted, the restrictions of sections 406(a)(1)(A) and (D), 406(b)(1), and 406(b)(2) of the Act, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A), (D) and (E) of the Code, shall not apply to the personal holding company consent dividend election (the Consent) with respect to Sammons Enterprises, Inc. (Sammons), by the trustee of the ESOP, provided that the following conditions are satisfied:
(a) The trustee of the ESOP is an independent, qualified fiduciary (the I/F), acting on behalf of the ESOP, which determines prior to entering into the transaction that the transaction is feasible, in the interest of, and protective of the ESOP and the participants and beneficiaries of the ESOP;
(b) Before the ESOP enters into the proposed transaction, the I/F reviews the transaction, and determines whether or not to approve the transaction, in accordance with the fiduciary provisions of the Act;
(c) The I/F monitors compliance with the terms and conditions of this proposed exemption, as described herein, and ensures that such terms and conditions are at all times satisfied;
(d) Sammons provides to the I/F, in a timely fashion, all information reasonably requested by the I/F to assist it in making its decision whether or not to approve the transaction;
(e) The consent dividend will represent no more than two percent (2%) of the ESOP's assets in any taxable year within the timeframe of the exemption proposed herein;
(f) Shares of Sammons stock are held in an ESOP suspense account, and are allocated each year to each eligible ESOP participant at the maximum level permitted under the Code;
(g) All of the requirements of section 565 of the Code are met with respect to the Consent; and
(h) All shareholders of Sammons are requested to consent to the dividend in the manner prescribed under section 565 of the Code.
1. Sammons Enterprises, Inc. (Sammons) is a multi-faceted, global holding corporation headquartered in Dallas, Texas that owns and operates businesses and manages an investment portfolio across a diverse range of industries. Sammons was founded by Charles A. Sammons in 1962. Its roots originate in Dallas, Texas, where Mr. Sammons began Reserve Life Insurance Company in 1938, providing the foundation for what has grown into Sammons. Beginning in the early 1950's, Mr. Sammons began to diversify Sammons' operations, purchasing interests in the communications, industrial products distribution, insurance, travel and hospitality industries. Sammons has now concentrated its investments into three sectors—life insurance/annuities, equipment distribution, and hospitality and real estate.
2. The Sammons Enterprises, Inc. Employee Stock Ownership ESOP (the ESOP) was originally established in 1978 and, prior to 2010, had acquired approximately 4% of Sammons' outstanding shares. Prior to his death in 1988, almost all of Sammons' outstanding shares, other than those owned by the ESOP, were owned by Charles A. Sammons. At the time of his death, Mr. Sammons' shares passed to a charitable remainder trust with his widow Elaine D. Simmons as lifetime beneficiary. In 1997, Congress amended the Internal Revenue Code of 1986, as amended (the Code) to permit an ESOP and its related trust to be a beneficiary of a charitable remainder trust. This change in law allowed the ESOP to be named remainder beneficiary of the charitable trust established by Mr. Sammons. In January 2010, following the death of Mrs. Sammons, all of the Sammons shares held in the charitable remainder trust were transferred to the ESOP. The ESOP made no payment for the shares received from the charitable remainder trust.
3. As a result of the transfer to the ESOP, it presently owns 99.997% of Sammons' outstanding shares. The remaining 258 shares (representing .003% of Sammons' outstanding shares) are owned by 12 individuals who are former Sammons employees and ESOP participants who received their shares as part of their ESOP distributions.
4. As of December 31, 2010, the Sammons stock was valued by the ESOP's independent appraiser at $512 per share. The aggregate fair market value of the ESOP's Sammons share holdings is $4,099,394,048.
5. Although the ESOP is not leveraged, under a special structure established pursuant to section 664(g) of the Code, the shares acquired from the charitable remainder trust are held in an ESOP suspense account, and are currently allocated each year to each eligible ESOP participant at the maximum level permitted under Code section 664(g)(7),
6. The trustee of the ESOP trust is the applicant, GreatBanc Trust Company (GreatBanc). GreatBanc is nationally recognized as a highly skilled independent ERISA trustee specializing in ESOPs and ESOP transactions. GreatBanc's management team and staff have an average of over 20 years' experience in the financial services industry, and include legal and
7. As a result of its closely held nature and the types of revenue generated by certain of its lines of business, Sammons is potentially subject each year to a set of federal tax rules referred to as “personal holding company taxes” (PHCT). Although Sammons is a subchapter “C” corporation and pays its full share of corporate income taxes, the applicant represents that these PHCT rules can subject Sammons to a significant federal tax burden over and above that applied to most other companies. Given the ESOP's almost complete ownership of Sammons, these additional taxes would operate to the direct detriment of the ESOP and its participants.
8. The applicant represents that the pertinent sections of the Code were first adopted in 1934 at a time when federal corporate tax rules were substantially lower than individual tax rates. This rate differential prompted wealthy individuals to place their passive investments in controlled corporations, with the idea that ongoing investment earnings could grow and be reinvested in substantially greater amounts than if held directly by the individual investor. The PHCT rules seek to thwart this strategy by imposing an additional tax, at the highest individual tax rate, on the corporation's “undistributed personal holding company income.” By thus equalizing corporate and individual tax rates, the incentive to place the individual's investment portfolio in a corporate structure is removed. Currently, the PHCT rate is 15%, which equates to the top individual rate on capital gains and qualifying dividends.
9. According to the applicant, the PHCT only applies if the corporation earns over 60% of what is referred to as its “adjusted ordinary gross income” from sources such as interest, dividends, rents and royalties. Although these particular forms of income may be suggestive of purely passive investments, they are defined under the Code in such a way that income from actively conducted trades or businesses can fall within their purview. For example, one Sammons subsidiary actively rents and sells industrial equipment to businesses in various states. The subsidiary employs approximately 450 workers who service and maintain this equipment. Although this business is an active, operating venture, it generates rental income which is subject to being characterized as personal holding company income. According to the applicant, these tax rules not only potentially subject Sammons, and, indirectly, the ESOP, to a tax burden which has nothing to do with the original purpose for which the tax rules were enacted, they also distort the ways in which Sammons must operate its businesses, to the detriment of the ESOP and its participants.
10. Sammons' business planning is thus significantly influenced by the potential application of the PHCT, and otherwise desirable business activities are avoided or structured in a less efficient manner so that Sammons may maintain its tax obligations at the same level as that applicable to its competitors.
11. Because the PHCT is applied to the company's undistributed personal holding company income, it is possible to avoid the tax by paying to the company's shareholders dividends equivalent to the amount of the company's personal holding company taxable income. The applicant represents that while the payment of such a dividend would resolve the PHCT problem, it is not an attractive alternative for (a) investors who would prefer to have the dividend amount remain invested in the company in order to fund future growth, or (b) companies that lack the liquidity to pay the required dividend.
12. In response to these concerns, section 565 of the Code allows companies to pay what is called a “consent dividend.” In the case of a consent dividend, the shareholder agrees to recognize current income on a “deemed dividend” that is not actually distributed to the shareholder in cash. Rather, the shareholder is treated, for tax purposes, as if it had received the dividend (on which it will be taxed), and then made a capital contribution to the company in equivalent amount. The amount of the consent dividend remains within the company to be utilized in furtherance of the company's objectives and shareholders' interests.
13. The applicant has requested an exemption to permit the Plan, based upon the discretionary determination of GreatBanc as trustee and independent fiduciary, to utilize the consent dividend process available to shareholders under Code section 565. If, in a year in which Sammons would otherwise be subject to the PHCT, the ESOP were able to elect to “receive” a consent dividend in an amount sufficient to represent a complete distribution of Sammons' personal holding company income, Sammons would be able to achieve significant tax savings at virtually no cost to the ESOP. This is because the ESOP, being a tax-exempt entity, would have no tax liability as a result of “receiving” the consent dividend. The applicant states that this represents a legitimate and appropriate use of the consent dividend process under Code section 565, and is entirely consistent with the language and purpose of that Code section, as well as the provisions of sections 401(a) and 501(a) of the Code.
14. For example, if a $5 million distribution were required in order to avoid imposition of the PHCT upon Sammons, a $5 million consent dividend would save Sammons, at the current surtax rates, $750,000. Virtually
15. The applicant represents that the ESOP's participation in the consent dividend process will permit Sammons to manage its businesses and conduct long-range business planning without the need to structure its operations, or to forego potentially profitable opportunities and initiatives, so as to avoid the generation of personal holding company income. This will create greater opportunities for corporate growth and the enhancement of shareholder value, which will inure
16. In summary, the applicant represents that the subject transaction satisfies the criteria contained in section 408(a) of the Act because: (a) The trustee of the ESOP, GreatBanc, is an independent, qualified fiduciary, acting on behalf of the ESOP, which determines prior to entering into the transaction that the transaction is feasible, in the interest of, and protective of the ESOP and the participants and ben