Meeting with David Beattie in Cork 24th March 2011
The meeting with David Beattie took place at the request of the Cork Branch.
The Branch had been worried about a number of issues regarding the shares of retired and VS members. They wrote to him requesting a meeting to discuss the following issues.
The tax issues for shareholders as outlined in Mr. Beattie’s letter to Participants on the 16th February and the fact that he had briefed the group of Unions and the ESB on the issues and as representatives of the retired and VS staff we were anxious to have a similar briefing. The other issue was our concern at the setting up of the internal market at this time, before we knew what the Government were going to do regarding selling off assets etc. Also the fact that the staff were being asked for a 20% reduction in the payroll costs was not the best time to be selling shares to them.
Regarding the tax issue, the Finance Act 2011 gave force to the Budget 2011 to apply PRSI and Universal Social Charge to share awards which would have significant implications for our own ESOP. In effect, this would potentially mean a tax charge of up to €21.75 on every €100.00 of shares appropriated to members.
10.75% Employers PRSI €10.75
Up to 4% Employee’s PRSI 4.00
Up to 7% USC 7.00
Total Tax Charge per €100 shares distributed €21.75
Mr Bettie was able to tell us some good news and that was that the department announced recently that the PRSI charges no longer applied. So that the 21.75% problem now becomes a 7% problem. There had been a lot of ESOP’s activity in this regards with lots of lobbying etc. It is hoped that the USC might also come under pressure because of the retrospection aspect. When we signed up to this deal the tax issue was taken care of. People who sign up from the 1st January are going to be caught for the PRSI.
Our meeting would best be represented in a question and answer format below to cover as much as possible the content of the meeting.
Branch: What % of the shareholders are retired?
David: The percentage of beneficiaries who are former employees (including retired staff) is now a little above 41%
Branch: How many retired staff was there when the ESOP was set up?
David: The number of former employees (including retired staff) at set up was around 10%
Branch: That 41% figure is obviously going to rise, how do you see that working out?
David: Retired staff is going to be in the majority. This is at the moment going slower then expected. One of the reasons I was anxious to come down here was that it is easy for us to keep in touch with the staff who are still working in the company.
Branch: We want to clear with you that you would give our Retired Staff Association a briefing in their own right?
David: I would have no problem doing exactly as I am doing here today. We are trying to achieve balance between Purchasers and beneficiaries.
Branch: Would you talk to the Group of Unions about giving one or two nominations (board) to us at this stage?
David: We are not allowed to do that under the legislation. It is one of the anomolies in the legislation that the representation on the ESOP is employee’s even though the beneficiaries are both employees and people who have retired.
Branch: How are the Trustees appointed?
David: The rules are two nominated by the Company and four nominated by the present staff or by the Group of Unions. It was felt that the Group would take ownership of this aspect to achieve balance. Where as if it went out to general ballot it would be every man for himself. It would require legislation to change this. If retired staff looked to have retired members included in the Trustees it would be up to the Group of Unions to bring that change about and have them included in the line up. It would be up to you to approach this aspect because I would have no role here and would not want to be stepping on anyone’s toes.
Branch: Why are you proposing to set up the internal market now?
David: We were supposed to start that process in 2005 and the reason we didn’t was that when we looked at the internal market and the way the rules had been written (by the Department of Finance). We modelled what was likely to happen and the conclusion we came to was that they hadn’t anticipated such a large number of leavers who would have to sell a large number of shares the minute they came out. There was far too high a chance that the result of that would be that people who were being force to sell would be short changed and that ultimately there would be too few buyers to take up the shares that they were being forced to sell. To get that changed we needed the approval of ESB, the Group of Unions the shareholders approval in the ballot and the approval of the department of Finance. After a torturous delay from the Dept. they eventually agreed with the proposal. After that we started the steps to distribute the shares the first step in this was to get a valuation of each share agreed with the Revenue. Then there was the pension fund problem and the Transmission Assets issue. We decided to postpone and that is why we had the second ballot.
Branch: Our view would be that this is the worst possible time to set up the internal market. First of all there wouldn’t be a market part of the reason would be that the Company want to take 20% out of payroll costs over a four year period. There is the whole question of the Government selling off non-strategic assets. What constitutes non-strategic? Etc. Also the Manifesto of the Fine Gael Party calls for the setting up of the Smart Grid merging Eirgrid with ESB Networks and indeed bringing in the Gas Network as well?
David: It will be a very expensive exercise to break up the company and will take a long period of time.
Branch: Is there a legal imperative to set up the internal market?
David: According to the legal framework we have to have all the shares out by 2016. If we don’t people whom no longer work for the company will have to pay full income tax on their shares and we cannot allow that to happen. On the other had with the changes in the market what we have done is we have ensured that for the first three years after the shares have come out no one is forced to sell them. The funding model for the market for those years shows the ESOP hanging on to the second half of the shares until we have started to run some of the forced sales markets so that forced sellers get a fair crack of the whip. So if you add all of that together and we are now in 2011if we don’t get shares out this year and get three markets run and into the fourth market before we are forced to divvy out the second half of the shares the market is not going to work at all. I believe the logical way forward for ESOP is to try and get some fresh funding and to buy back some of the shares that are offered in the market and allocate them to the current pool of employee’s of which there are about two thousand people in the company who have no shares.
Branch: Have you any view of what would happen if there were a fire sale of assets in the ESB.
David: All sorts of things might happen. Our job is to protect the value of the shares as best we can either by preventing a fire sale or if it comes at least getting a fair crack out of the proceeds. The Eircom one wasn’t a very good model but it did do well for the beneficiaries when there was that sort of activity. We have access to the same level of advice and if it does happen we will be there to protect the value in so far as we can. The best way is to hold the company together but if that isn’t going to work at the end of the day we will be looking for the best value we can get.
Branch: To what extent does being in possession of the shares give the unions strength to prevent the fire sale of assets?
David: The internal market will keep the shares in the hands of the employees anyway. There was a proposition at one stage for the company to buy them back. If this was to happen then they would cease to exist. The one thing that having the block of shares does is it prevents the Department from treating the ESB as purely a state asset to do with as it chooses.
Branch: Have our shares the same status as ordinary shares?
David: They are exactly the same as the minister holds. The difference is that for every one we hold he holds ninety-five.
Branch: Could the new Government pass legislation tomorrow which could invalidate our scheme.
David: They could pass legislation that could make life difficult for us. I don’t think they could invalidate the scheme because we have constitution protection and ironically we have also got the Lisbon Treaty for protecting things like this.
Branch: Do the different ESOP’s meet very often?
David: There is a body called the Irish Pro Share Association. It deals with all the different share schemes and it has a subgroup for the ESOP’s and they do meet and it’s sponsored by IBEC. But for the last couple of terms the chairman of the association has been comprised of Trade Union officials so it’s a sort of cross border thing.
Branch: The baseline value set for the shares is that still in existence or has it changed?
David: No, that hasn’t changed and it won’t change until we hand over a lump of shares. When we do that there will be a new value published and I would hope it would be at a higher level then the baseline.
Branch: What’s happening with shares that come back from deceased members.
David: We already divvied out those and there is a few more built up now and they will be divvied out as well to existing shareholders.
Branch: What was the baseline value of the shares?
David: The original value of the shares was 77 cent per share.
Branch: Is there any notional value now on the shares?
David: Only the original one. The first one will be when we have the valuation and you will be told it.
Branch: You must have some figure in mind?
David: No I don’t and I am being really careful here I don’t.
Branch: When you set up the internal market and you announce there are X amounts of shares for sale and there is little or no interest in the shares do you have an option of withdrawing those shares?
David: What you do is you put down you have 800 shares and I want to sell at €2.50 and someone comes in and says they want 800 shares at €2.50 they will be sold. If someone comes in and says they want 800 shares at €2.30 they wont be sold. If on the other hand when all the calculations are done if the average price is over €2.50 you will get the higher price.
Branch: What effect had the Departments decision to turn down what had been agreed in the last ballot?
David: It would have opened the door to us if we wanted to postpone a bit more but we cant. The ESOP can last until 2021 but for the last five years it can only give shares tax free to current employees.
Branch: Explain this selling of the shares after three years. Will they all come on the market together or will the people who had them first go first?
David: What will happen is. Let’s say you get a lump of shares in September that will start a six-year clock on those shares. For the next three markets you don’t have to sell any. You will be the same as any other beneficiary. In year four you come to the market and you must put up a third of the shares you have remaining for sale and you cant name a minimum price. The following year you will have to put half of the remainder. You can put up more in these years if you want to and name a minimum price for that extra lump.
Branch: The people bidding for shares. Will these people know if it is our first time etc. we are selling those shares?
David: They won’t know anything like that.
Branch: For example come September we will get a lump of shares and we are told congratulations you are now the proud owner of x amount of shares?
David: That’s exactly what will happen and if you do nothing with those shares which you are entitled to do the next time a dividend is paid the cheque will come from the ESB directly to you.
Branch: What is the mechanism for running the market?
David: We have to appoint an auctioneer of shares. We can’t do it because we will be bidding in it. They will write out to you. There will be two forms do you want to sell some shares, how many and what minimum price do you want. Do you want to buy some shares in which case up to how many and what’s your maximum price.
Branch: Will there be a guide price?
David: No the only guide price you will have is when you get the shares from us there will be a value on them then. After that the value is not going to change very much before the first market if it is held as soon as we intend.
Branch: Would it be in our best interest to get Mercer or somebody like that to advise the people selling the shares.
David: Although we will be in competition to buy shares we as Trustee are right in the middle because while your still a shareholder we owe you a duty to treat you reasonably and fairly. Equally we owe the other beneficiaries a duty to treat them fairly. So while our bid won’t be published any more then yours won’t be the only person who will get it is the auctioneer. Afterwards you will get a statement saying how many shares was for sale, how many were sold and the average price.
Branch: How will the share distribute out?
David: There are 99million shares in the ESOP. We will be giving out about half of them that’s 50million and if 40% go to retired people that’s about 20million shares. There is no way of knowing how many will come on to the market at any given time.
Branch: Would there be bios by ESOP towards working staff in the working of the market?
David: Our obligation is to treat people fairly and as similarly as we can. But when we are bidding for shares we won’t know where they come from.
Branch: Is there some way you can limit the amount of shares coming on the market so there wont be a glut?
David: That is exactly the problem we were trying to solve and we had to negotiate with the Department of Finance and everybody else to try and come up with something they could live with. They knew we had this 2016 limit so that’s how we ended up with the six-year period. It was a three-year period.
Branch: What is the worse case scenario for the internal market?
David: The worse case scenario was before the ESOP was allowed to buy. Which it is now? What we were terrified by was that people would put in stupid bids of a cent per share and have them filled at the expense of the people who have left. The reason for the delay was to rewrite the market to protect people who were obliged to sell.
Branch: What is the position of a director having to step down from your board when they retire. Is there an impediment to a retired person being on the board?
David: Trustee Directors are appointed for a period of four years.
Branch: We were thinking that maybe down the road we should be talking to the Group about maybe ceding positions on the Board to retired staff?
David: You have to understand that I can’t get into that. I get a call to tell me who the company ones are similarly I get a call from the Group telling me who their nominations are. It’s up to them. If I got involved in that I wouldn’t have a job.
Branch: Do you intend to do a briefing in the near future?
David: Before we run a market we will be doing a roadshow and we will have a pack of information to give as well with as much information as we possibly can. We need a lot of co-operation when we start that.
Branch: When you are establishing the value of the shares will it be based on an earning ratio?
David: What they will do is that they will take into account earnings, assets, liabilities they will look at the balance sheet they look at cash flow. They will try and reach a reasonable balance as to what influence each of those factors has. It will be an independent body that will do this. When they come up with this valuation we will then have to sit down with the revenue and agree it with them. Usually the revenue will accept or reject. They will not negotiate. At the end of the day whatever they agree that will be the valuation.
The Branch wishes to express their thanks to Mr Beattie for the honest and frank way he dealt
with our questions.