THE BASICS OF ESOP TRUSTEE FIDUCIARY DUTIES The trustee of an - - PDF document

Edward F. Feibel One Portland Sq., 7th Fl., P.O. Box 15235 efeibel@eatonpeabody.com Portland, Maine 04112-5235 Phone 207-274-5266 Fax 207-274-5286 www.eatonpeabody.com

AUGUSTA I BANGOR I BRUNSWICK I ELLSWORTH I PORTLAND

THE BASICS OF ESOP TRUSTEE FIDUCIARY DUTIES The trustee of an employee stock ownership plan (“ESOP”) is subject to four core fiduciary standards found in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), that apply to all individuals and entities serving as fiduciaries to employee benefit plans subject to ERISA. The trustee of any ERISA plan is required to manage and administer trust assets: (1) Solely in the interests of plan participants and beneficiaries; (2) For the exclusive purpose of providing benefits to plan participants and their beneficiaries and defraying reasonable expenses of administering the trust; (3) With the care, skill prudence and diligence that, under the circumstances then prevailing, a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (4) In accordance with the plan document and the trust agreement to the extent that the plan document and trust agreement are consistent with ERISA. In the event of a conflict between the documents and ERISA, the ESOP trustee must act in a manner that is consistent with ERISA, regardless of the express terms of the documents, and in accordance with applicable requirements of law. In addition, an ESOP trustee must not cause the plan to engage in a transaction if the trustee knows (or should know) that the transaction is a “prohibited transaction” under Section 406 of ERISA or §4975(c) of the Internal Revenue Code of 1986, as amended (the “Code”). It is a prohibited transaction and a breach of the trustee’s fiduciary duty under ERISA for the ESOP trustee to pay a price in excess of fair market value for employer stock. This is the “hot” issue at the formation of the ESOP and at the time of any subsequent stock purchase. The ESOP trustee’s specific powers, duties and responsibilities are set forth in the trust document (which frequently is, but need not be, a separate document from the plan document). These powers include the purchase and sale of company stock. The ESOP trustee, in consultation with its legal and financial advisors, in its sole discretion (at all time subject to the four core fiduciary standards) negotiates all terms of any purchase of company stock, including the

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borrowing of funds for that purpose. The ESOP trustee then enters into the series of transactions that result in the ESOP trust owning all or a portion of the outstanding common stock of the employer company. The following is a list of some of the specific duties that the ESOP trustee, in concert with its advisors, must perform in connection with any purchase of company stock:

• Engage in a diligent, independent investigation of the company issuing the securities.
• Visit the company premises, review relevant corporate governance documents and

interview management.

• Engage its own advisors and not merely accept the advisors picked by the seller

(whether that is individual shareholders or the company).

• Actively participate in the negotiation of the price and terms of the investment and

not rely passively on its advisors to do so.

• Have the experience and knowledge that enables it to understand the nature of the

investment (the “expert prudent man”).

• Undertake an independent review of the terms of any ESOP loan and other financing

terms.

• Question its advisors about their conclusions, the basis of their conclusions and the

underlying analysis (that is, the ESOP trustee must scrutinize the work of its advisors).

• Furnish to its advisors any relevant data or information it may have at its disposal that

is otherwise not publicly available.

• Investigate the solvency of the company post-transaction.
• When an ESOP trustee accepts a successor trustee appointment, the ESOP trustee

must review the predecessor’s records and actions and make an assessment of their adequacy. Some of these duties are of especial importance to an outside trustee, however, they are equally (and perhaps even more) important to an inside trustee. I should note that where a committee of individuals serves as the ESOP Trustee, each committee member will be treated as an ERISA fiduciary with respect to the ESOP, although only the committee as a body generally has the power and authority to act as the ESOP trustee. No individual committee member has the power

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to bind the committee as the ESOP Trustee unless the committee has specifically delegated that power and authority to that member. Each committee member is expected to act to ensure that the committee is fulfilling the above-listed duties. Each committee member is a fiduciary for ERISA purposes, notwithstanding that he/she generally cannot exercise unilateral trustee power. When the company stock is not publicly traded, the value of the company’s common stock must be determined through an independent third party appraisal that is performed no less frequently than once each plan year. As of the last day of the plan year (or such other valuation date as is specified in the plan and/or trust), the trust assets, including company stock, must be valued and a valuation date declared in order to determine if a material change in the value of the company stock has occurred. A valuation date automatically occurs on the date the ESOP

• terminates. It is important to note that it is the responsibility of the ESOP trustee, not the

company, to retain the appraiser. The U.S. Department of Labor emphasizes that the appraiser must be independent of the company and the soon-to-be former shareholders. This is true at formation of the ESOP and thereafter. Practitioners have interpreted this guidance to mean that if an appraiser has done work for the company or the shareholders (for example, in considering another transaction before the formation of the ESOP or by providing a valuation to the shareholder for estate planning purposes), that appraiser no longer is independent and another appraiser must be retained by the ESOP trustee to ensure that the appraiser’s loyalty runs exclusively to the ESOP trustee (and ultimately to the participants). Any person who is a fiduciary with respect to an employee benefit plan subject to ERISA who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA can be held personally liable: (i) To make good to the plan any losses to the plan resulting from each such breach; (ii) To restore to the plan any profits of the fiduciary that have been made through the use of assets of the plan by the fiduciary; and (iii) Shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of the fiduciary. If the ESOP experiences a loss as a result of improper trustee activity, the trustee may be held liable for the loss (the loss will be equal to the difference between actual investment returns and what the trust would have earned had the trustee acted properly).