U.S. News and World Report, Inc. offered a profit-sharing plan to its employees that, among other features, distributed stock to its employees based on years of service with the goal of making the company entirely employee-owned.

Although the employee stock had equal voting rights, the stock was restricted and employees could not sell, pledge, or transfer their stock during their employment. Upon termination of employment or retirement, the stock had to be sold back to the company using a predetermined procedure that valued the stock annually through an outside appraiser. In 1984, U.S. News was purchased for

$176 million, and Foltz brought a class action suit for employees who had sold their stock back to U.S. News alleging their stock had been grossly undervalued.

One of their claims centered on whether the employees’ interest in the profitsharing claim constituted unregistered securities.

CASE QUESTIONS

1. Can a noncontributory profit-sharing plan be a security under the Howey test? Why or why not?

2. If employees were required to purchase the interests, would that change your answer in Question 1? Why or why not?