Appvion Workers Learn Their Employee Stock is Likely Worthless
APPLETON - Appvion's public announcement last week of its proposed sale left out a significant detail.
The paper company has an Employee Stock Ownership Plan (ESOP), which means the company is owned by its employees. If the proposed $325 million bid by an unnamed lender is successful, the ESOP will have no value and employees will lose the shares they expected to collect at retirement, according to a letter sent internally to employees by company CEO Kevin Gilligan.
The internal letter was forwarded to USA TODAY NETWORK-Wisconsin by an Appvion worker.
In the letter, Gilligan wrote:
"As we noted when we began our restructuring, the ESOP was a critical item in our discussions with our lenders, and we advocated for the interest of ESOP Plan Participants as best we could.
"However, as in any bankruptcy proceeding, equity holders do not negotiate from a position of strength and, under the Purchaser's offer, the current ESOP structure would not continue and your interests in the ESOP will not have any value."
RELATED: Appvion proposes sale to group of lenders
RELATED: Appvion sorts out job loss details in Appleton
RELATED: Appvion files for bankruptcy protection, looks to reorganize
In a follow-up email to USA TODAY NETWORK-Wisconsin, company spokesman Bill Van Den Brandt said if the company gets a higher offer before the April 19 bid deadline, there is a chance that ESOP members could recoup something.
"Yes, that is possible," he said.
Appvion filed for Chapter 11 bankruptcy reorganization in October.
Gillian told employees the company was working with its lenders before and after the filing to find a solution "that would reduce our debt, enhance our liquidity and best position Appvion for the future."
The company is in an unusual position, said an ESOP expert.
"ESOP bankruptcies are actually quite rare," said Corey Rosen, founder of the National Center for Employee Ownership, a nonprofit research organization in Oakland that provides information on ESOPs. "We did a study during the recession and the default on loans from creditors was two per 1,000 per year. ESOP companies go bankrupt much less often than non-ESOP companies. Unfortunately, Appvion is not one of them."
Prior to founding the NCEO in 1981, Rosen taught government at Ripon College and worked in Washington, D.C. He was familiar with Appvion's ESOP.
In Chapter 11 bankruptcy, Rosen said companies can sometimes reorganize, get finances back in order and become successful. In those cases, an ESOP could emerge stronger.
Appvion's sale is a different story.
"When there's not much value left, they're just buying and taking care of the liabilities and obligations. Once they've done that, there's no more money to distribute," Rosen said.
"The employees have the same status as any other shareholders in a bankruptcy. Once the sale is resolved and creditors get paid off, if there are any remaining assets for distribution, the shareholders get whatever's left."
The company's November report to the SEC showed it had total liabilities of $745 million, including short- and long-term debt, at the time of the Chapter 11 filing.
Appvion spokesman Van Den Brandt said the sale was deemed the best course forward because it keeps the company running.
"The purchase offer is for the company to be operated as a going concern and is subject to competing bids," he said. "The purchase would remove approximately $500 million in debt and enable Appvion to emerge from bankruptcy as a healthier and financially stable enterprise."
Creditors often accept a percentage of money owed in bankruptcy proceedings.
Appvion's ESOP is different from a typical ESOP because it included employee contributions. Normally, ESOPs are funded by companies and do not include employee contributions.
"They (the employees) transferred $107 million from the 401(k) plans into the ESOP in 2001," Rosen said.
A 2001 story from The Post-Crescent verified that number.
"More than 90 percent of the company's 2,500 employees elected to participate, signing over a total of $107 million in retirement savings to form the down payment on the $810 million purchase from European-based Arjo Wiggins Appleton. The plan, which makes the company 100 percent employee-owned, remains extraordinary given both the rate of participation and huge nine-figure sales price."
Appvion's ESOP continued to accept employee contributions.
"Employees have had the choice to defer a portion of their compensation into the company stock as part of the company's tax-deferred retirement savings plan," said Van Den Brandt.
The company's second quarter 10-Q filing showed the fair market value of one share of common stock, as of July 2, 2017, was $6.85. Based on that value, ESOP shares outstanding were worth $39.9 million, it stated.
The company also had a 401(k) option in its retirement options.
"Funds accumulated in employees' 401(k) accounts are separate from company's finances and are not affected by the company's Chapter 11 filing or any sale process," Van Den Brandt said.
Pension plans, which cover some of the current employees, will be taken over by the federal government's Pension Benefit Guaranty Corporation.
Van Den Brandt said Appvion's sale terms can still change.
"The current asset purchase agreement is not final and discussions with our lenders continue. Also, as I noted, the purchase offer is subject to the filing of competing bids that might include different consideration of the ESOP structure. However, any bid would need to address the claims of the company lenders and creditors first."
If this deal goes through, Van Den Brandt said the new owners have some changes in mind.
"While details are not yet determined, following completion of the process, the lenders intend to implement incentive and benefits programs, over time, that recognize Appvion employees' continued contributions to the business moving forward, as employees and prior owners."
Appvion currently has about 1,300 employees, including approximately 740 in Appleton.
The company produces thermal, carbonless, security, inkjet, digital specialty and colored papers. The company operates coating and converting plants in Appleton and West Carrollton, Ohio, and a pulp and paper mill in Roaring Spring, Pennsylvania. Its headquarters are in Appleton.
Van Den Brandt said members of the senior management team conducted information sessions for employees this week at the three facilities.