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2003-14A
ERISA Sec. 407(d)(5) & 407(f)(1)
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Mr. Steven J. Sacher
Kilpatrick Stockton LLP
607 14th Street, NW, Suite 900
Washington, DC 20005-2018
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Dear Mr. Sacher:
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This is in response to your request for an advisory
opinion with respect to the application of sections 407(d)(1), (5), and
(7), 407(f)(1) and 408(e) of the Employee Retirement Income Security Act
of 1974 (ERISA).(1) In
particular, you request an opinion as to whether certain stock described
below is a qualifying employer security in connection with a proposed
exchange (the Exchange) between General Motors Corporation (GM) and
several employee benefit plans that it sponsors (the GM Plans). You
represent that the Exchange is part of a broader transaction, described
below, whereby GM, subject to the approval of GM shareholders and
satisfaction of certain other conditions, plans to split-off GM’s
wholly-owned subsidiary, Hughes Electronics Corporation (Hughes).
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GM has two classes of publicly held common stock – GM $1 2/3 Par Value
Common Stock and Class H Common Stock (Class H Stock). The Class H Stock is
a New York Stock Exchange-traded “tracking” stock, the value of which is
intended to reflect the business performance of Hughes. As of the date of
the Exchange, there will be approximately 1.1 billion shares of GM Class H
Stock issued and outstanding. In addition, there will be approximately 279
million shares of Class H Stock authorized but unissued. The GM Plans in the
aggregate own approximately 373 million shares of Class H Stock, about 33.7%
of the Class H Stock issued and outstanding.(2)
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Hughes has two classes of common stock – Hughes Common Stock (referred to
as Hughes Class A Common Stock) and Hughes Class B Common Stock, the terms
of which are identical in all respects. GM currently owns 100% of both
classes of the Hughes stock. You represent that the reason that there are
two classes of Hughes stock is to enable GM to isolate the separate and
distinct tax bases associated with the Exchange and to facilitate the post
split-off merger with the buyer of Hughes. As of the date of the Exchange,
there will be approximately 1.4 billion shares of Hughes common stock issued
and outstanding, comprised of approximately 1.1 billion shares of Class A
Stock (which corresponds to the issued and outstanding Class H Stock) and
approximately 279 million shares of Class B Stock (which corresponds to the
authorized but unissued Class H Stock). The Hughes Class A Common Stock
corresponds to the issued and outstanding GM Class H Stock, which is owned
by the GM Plans as well as unrelated investors.
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The GM Plans that currently own GM Class H Stock and
are expected to participate in the Exchange are:
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The Hourly-Rate Employees Pension
Plan (Hourly Pension Plan), a tax-qualified, non-contributory defined
benefit plan covering GM hourly employees represented by several
different unions;
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The Retirement Program for Salaried
Employees (Salaried Pension Plan), a tax-qualified, contributory
defined benefit plan covering GM salaried employees;
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The Savings-Stock Purchase Program
(Salaried 401(k) Plan), a tax-qualified, eligible individual account
savings plan covering GM salaried employees;
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The Personal Savings Plan (Hourly
401(k) Plan), a tax-qualified, eligible individual account savings
plan covering GM hourly employees represented by several different
unions;
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A Voluntary Employee Beneficiary
Association Trust (VEBA) established to fund U.S. hourly retiree
health care life insurance/disability benefits under certain GM
welfare plans and to pay administrative expenses associated with
providing such retiree benefits. The VEBA is tax exempt under section
501(c)(9) of the Code. The VEBA also qualifies as a welfare benefit
fund described in section 419A(f)(5)(A) of the Code. The VEBA is not
associated with an eligible individual account plan.
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As of March 12, 2003,(3)
the holdings of GM Class H Stock by the GM Plans were:
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Hourly Pension Plan – 172.8
million shares, approximately 15.6% of the Class H Stock issued and
outstanding;
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Salaried Pension Plan – 97.9
million shares, approximately 8.8% of the Class H Stock issued and
outstanding;
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Salaried 401(k) Plan – 30.4
million shares, approximately 2.7% of the Class H Stock issued and
outstanding;
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Hourly 401(k) Plan – 9.8 million
shares, approximately 0.9% of the Class H Stock issued and
outstanding;
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VEBA – 61.8 million shares,
approximately 5.6% of the Class H Stock issued and outstanding.
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Thus, the GM Plans hold approximately 373 million
shares of GM Class H Stock or about 33.7% of the Class H Stock issued and
outstanding. In total, the Plans and other persons you represent are not
independent of the issuer(4) (GM)
hold approximately 35.8% of the Class H Stock issued and outstanding. You
represent that any changes that may occur in any of these holdings between
March 12, 2003, and the date of the Exchange will not be material to any
relevant test or limit under ERISA.
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GM will split off Hughes through a transaction that will include: 1) the
Exchange; and 2) the simultaneous sale by GM of the Hughes Class B Common
Stock to The News Corporation Limited (News Corp.), an Australian company
that you represent is totally independent of GM (the Sale). In the Exchange,
holders of GM Class H Stock, including the GM Plans, will exchange their
shares with GM for Hughes Class A Common Stock on a one-for-one basis. The
GM Plans will participate in the Exchange on the same basis as all other
Class H stockholders. You represent that when the Exchange and Sale close,(5)
Hughes will be split off from and wholly independent of GM.
Immediately following the Exchange and Sale, GM will no longer retain any
shares of Hughes common stock.(6)
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Completion of the entire transaction (the Sale and Exchange, and the merger)
is subject to a number of conditions, including approval by a majority of
both the holders of the GM $1 2/3 Par Value Common and Class H stock. The
transaction has been approved by the GM, Hughes, and News Corp. boards of
directors. The transaction remains subject to regulatory approval under the
Hart-Scott-Rodino Act and by the Federal Communications Commission, and is
contingent on the receipt of a favorable ruling from the Internal Revenue
Service that the split off of Hughes from GM will be tax-free to GM and its
stockholders for Federal income tax purposes.
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You request an opinion that: 1) as of the time of the closing of the
Exchange and Sale, the Class H Stock is a qualifying employer security
within the meaning of ERISA section 407(d)(5) and for purposes of ERISA
section 408(e); and 2) immediately following the closing of the Exchange and
Sale, the 50% independent of the issuer test of ERISA section 407(f)(1)(B)
is either not applicable, or, if applicable, is satisfied because more than
50% of the Hughes Class A Common Stock issued and outstanding will be held
by persons independent of GM.
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GM is an employer whose employees are covered by the GM
Plans, and thus is a party in interest to the GM Plans under section
3(14)(C) of ERISA. Section 406(a)(1)(A) prohibits any sale or exchange
between a plan and a party in interest. Section 408(e) of ERISA provides a
conditional exemption from the prohibitions of section 406 for, as here
relevant, the sale of qualifying employer securities by a plan to a party
in interest, provided that the sale is for adequate consideration and that
no commission is charged with respect thereto. Section 407(d)(5) of ERISA
defines the term “qualifying employer security,” as here relevant, to
be an employer security that is stock. With respect to plans that are not
eligible individual account plans, section 407(f)(1) further requires that
in order for stock to be a qualifying employer security, no more than 25%
of the aggregate amount of the same class of stock issued and outstanding
is held by the plan and that at least 50% of such aggregate amount is held
by persons independent of the issuer. Section 407(d)(1) defines the term
“employer security” as a security issued by an employer of employees
covered under the plan or by an affiliate of such employer. Section
407(d)(5) provides that a corporation is an affiliate of an employer if it
is a member of a controlled group of corporations of which the employer is
a member.
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You represent that prior to the Exchange and Sale,
Hughes is an affiliate of GM because GM owns more than 50% of Hughes
common stock. GM is an employer whose employees are covered by the GM
Plans, while Hughes is an employer whose employees are covered by the
Hughes Plan. Accordingly, both the GM Class H Stock and the Hughes Class A
Common Stock are employer securities with respect to the GM Plans and the
Hughes Plan within the meaning of section 407(d)(1) of ERISA. In addition,
common stock that represents an equity interest in the issuer is
considered stock as that term is used in section 407(d)(5) of ERISA
Therefore, both the GM Class H Stock and the Hughes Class A Common Stock
are stock. You represent that none of the Plans own more than 25% of the
GM Class H Stock, and that persons independent of GM own at least 50% of
the GM Class H Stock. Therefore, it is the opinion of the Department that
the GM Class H Stock and the Hughes Class A Common Stock are qualifying
employer securities with respect to both the GM Plans and the Hughes Plan
prior to the Exchange.(7)
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After the Exchange and Sale have been completed, GM
will own none of the Hughes Class A Common Stock. Therefore, Hughes will
cease to be an affiliate of GM, and immediately following the transaction,
the Hughes Class A Common Stock will not be an employer security with
respect to the GM Plans. Accordingly, it is the opinion of the Department
that the requirements of section 407(f)(1) will not apply to the Hughes
Class A Common Stock held by those GM Plans that are not individual
account plans.(8)
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ERISA's general standards of fiduciary conduct also
would apply to the proposed Exchange. Section 404 requires a fiduciary,
among other things, to discharge his duties respecting a plan solely in
the interest of the plan's participants and beneficiaries, in a prudent
fashion, and in accordance with the terms of the plan to the extent that
they are consistent with Titles I and IV of ERISA.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this
letter is issued subject to the provisions of the procedure, including
section 10 relating to the effect of advisory opinions.
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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Under Reorganization Plan No. 4 of
1978 (43 FR 47713, October 17, 1978), the authority of the Secretary
of the Treasury to issue rulings under section 4975 of the Internal
Revenue Code (the Code) has been transferred, with certain exceptions
not here relevant, to the Secretary of Labor. Therefore, the
references in this letter to specific sections of ERISA should be
taken as referring also to the corresponding sections of the Code.
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You represent that Hughes and other
members of GM’s controlled group sponsor eligible individual account
plans that also hold shares of Class H Stock.
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March 12 was the last business day
before the most recent contribution of Class H Common Stock to the two
defined benefit plans and the VEBA and was the date on which Class H
Common Stock holdings were measured to be certain that applicable
Title I percentage limits on holding employer securities would not be
exceeded immediately following the contribution. You did not request,
and we are not providing, an opinion regarding the contribution of GM
Class H Stock to the GM Plans.
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As of March 12, 2003, benefit plans
maintained by Hughes or other members of GM’s controlled group
(including the Hughes Non-Bargaining Employees Thrift and Savings Plan
(Hughes Plan), an eligible individual account plan), and officers and
directors of GM and Hughes held approximately 23.7 million shares of
Class H Stock.
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The closing of the Exchange and Sale
will occur on the same day, over a period of several hours.
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After the split off, News Corp.
will, in a separate and later transaction, acquire an additional 14.1%
interest in Hughes from holders (including the Plans) of Hughes Class
A Common Stock. This acquisition will be accomplished through a merger
of Hughes and a newly-formed, wholly-owned subsidiary of News Corp.,
with the terms of the merger resulting in the mandatory redemption of
a portion (i.e., 14.1%) of the Hughes Class A Common Stock received by
the former Class H stockholders in the Exchange. In consideration of
the redemption, holders of Hughes Class A Common Stock will receive a
specified number of shares of American Depository Receipts, each of
which will represent four Preferred Limited Voting Ordinary Shares of
News Corp. and/or, at the election of News Corp., cash. Hughes will be
the surviving entity in the merger and after the merger News Corp.
will own a 34% interest in Hughes. GM will not participate in the
merger transaction because it will occur after GM has ceased to be a
stockholder in Hughes. The Plans will participate in the merger
transaction in the same manner as other Hughes Class A stockholders.
You have not requested an opinion with respect to this subsequent
transaction, and the Department offers no opinion thereon.
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You represent, without requesting an
opinion thereon, that all of the conditions of section 408(e) of ERISA,
including the requirement that the acquisition of the Hughes Class A
Common Stock and the sale of the Class H Stock are done for adequate
consideration, will be satisfied in the Exchange. The Department
expresses no opinion as to whether the conditions of section 408(e)
will be satisfied in the Exchange.
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You did not request, and we are not
providing, an opinion whether the Hughes Class A Stock will continue
to be a qualifying employer security under section 407(d)(5) with
respect to the Hughes Plan following the Exchange and Sale.
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