Massachusetts Probes Origins of Polaroid ESOP

April 22, 2002 ( - Massachusetts' top securities regulator has launched an investigation to determine whether Polaroid forced employees to buy now-worthless stock to thwart a hostile takeover bid in 1988.

Word of the inquiry came just one day after the now-bankrupt Polaroid announced the sale of nearly all the firm’s assets for $265 million in cash to One Equity Partners.  However, that sale would not include the assumption of Polaroid’s pension liability. 

According to Reuters, William Galvin, Secretary of the Commonwealth of Massachusetts and the state’s chief securities regulator, said his office is investigating whether there was fraud when Polaroid established its employee stock ownership plan (ESOP) more than a decade ago.  ‘My office is concerned that many of the employees were, in effect, coerced into the purchase of the stock,’ Galvin said. ‘They were forced to purchase stock to protect their jobs.’

Shamrock ‘Shake’

Galvin contends Polaroid formed its employee stock ownership plan in the late 1980s to thwart a bid for the Cambridge, Massachusetts-based company by Shamrock Holdings. 

The bid, which was made during the peak of the leveraged buyout craze of the 1980s, was somewhat controversial even at the time.  The ESOP, which was formed just months prior to the Shamrock bid, followed a 5% pay cut and reductions in company contributions to 401(k), profit sharing and scheduled raises in exchange for a substantial ownership stake in the company.

The ESOP held about 15% of Polaroid’s outstanding stock at the time of the Shamrock bid, and participant/shareholders were provided an opportunity to tender the shares in their account either to Shamrock, to Polaroid or not to tender their shares at all.  The plan’s trustee (Nationsbank of Georgia) also communicated that non-responses would be considered directions not to tender the stock, as provided in the trust agreement for the Polaroid plan. 

Share Alike?

However, that communication did not specifically note that unallocated Polaroid stock held by the plan would be voted in the same proportion as the allocated shares – as provided for by the Polaroid plan.  That provision, common at the time, was subsequently challenged by the Department of Labor, who said that the trustee had an obligation to vote all shares of the plan in accordance with the best interests of the plan participants – even if that disregarded or countermanded specific instructions received from participants.  Nationsbank (now Bank of America) settled that dispute with the DOL in a 1999 settlement by distributing some $5 million in cash and stock to participants in the Polaroid ESOP.

Shamrock eventually abandoned its offer after being rebuffed by Polaroid management. It offered about $45 for each share of Polaroid, whose stock then traded for between $30 and $35.

Cut Backs

Last fall Polaroid workers were told the pension fund was underfunded.  Polaroid employees also saw their co-payments for health insurance increasing to about 50% of the total premium, up from about 20%, while retiree health benefits and insurance payments were eliminated.

Polaroid filed for Chapter 11 bankruptcy protection from creditors last October.

Polaroid’s Woes Extend to Retirement Plans