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ESOP company boards and ESOP trustees both have fiduciary obligations under ERISA to act in the best interests of employees as shareholders. It is very important that the board and trustee understand their own and each other's duties as well as how they need to work together on the following issues:

Trustees need to assess whether the board is acting to protect and enhance shareholder value. That may include making sure the board has the right people and they take their duties seriously. Boards typically nominate their own members with the trustees voting to approve their election. Trustees may recommend boards adding independent directors, for instance, or make sure board members get appropriate training. Trustees should receive the board report and other materials that help them understand how the company is performing. Trustees rarely get involved in business decisions that are the responsibility of management or the board.

The most important trustee task is determining the annual valuation update. The appraiser is hired by and works for the trustee, even though the company pays the appraiser's fees. Most trustees provide the final valuation report to the board because it is a valuable tool for understanding key value drivers for the company and is necessary for the board to be able to monitor the trustee. The trustee needs to make sure that the financial projections provided by the company are reasonable compared to historical and current performance. Preferably, the forecast should be stress tested. The trustee should review the assumptions and methodologies used by the appraiser, then report back to the board, often with the appraiser available for questions, on the results. The trustee should also provide a filled-out checklist of what steps they take to make sure the appraisal is done properly. The NCEO has a useful checklist for trustee appraisal reviews in the documents library of the members area that boards can use for this purpose.

Another important area is repurchase obligation. Boards are responsible for making sure the company has a practical plan to handle this, including how it is funded Generally, the CEO and/or CFO determine the liability and decide what to do, but the trustee should review the report and plans to make sure they are comfortable with the approach and to suggest alternatives if not.

Trustees are less involved when an ESOP company seeks to acquire another business. This is one of the many issues that fall under the rubric of business judgment. As a shareholder, trustees should act to make sure the company does not waste assets, but the legal standard for demonstrating this is very high, so only if trustees think the decision is egregious would they normally get involved. The board might seek their advice anyway, especially if the trustee has experience with acquisitions that can be helpful.

The issues become more complicated in an offer to buy the company. The leadership team will review any unsolicited offers and determine if it is a bona-fide offer or not. The NCEO has a sample letter in the documents library to potential acquirers that do seem serious that explains company policy. If the offer does seem serious and well-financed, the board reviews the offer. If there are individuals who are conflicted (a CEO on the board who might lose his or her job, for instance), the board may want to establish a separate committee. The trustee does not become involved until the process moves to a letter of intent. Now the trustee acts as the shareholder in negotiating whether to proceed, look for other buyers, or turn the offer down. The trustee will engage the appraisal firm to prepare an updated valuation, determine the sale proceeds to the ESOP, and ultimately obtain a fairness opinion on whether the proceeds the ESOP receives at closing are no less than fair market value. The trustee and its legal advisor will work with the board and the company's legal advisor to negotiate the terms of the transaction. Trustees ultimately need to make an investment decision as to whether the ESOP is better off selling or holding the employer securities.

Board duties include at least the following:

  • Grow shareholder valu
  • Set corporate strategic goals and business strategy
  • Appoint officers and board committees
  • Hold CEO and leadership team accountable
  • Evaluate and approve significant corporate transactions
  • Review financial performance
  • Facilitate succession planning
  • Determine compensation for leadership team
  • Establish corporate standards and conduct
  • Monitor risk management
  • Determine retirement plan contributions, dividends, and distributions
  • Adopt, amend, and/or terminate the ESOP
  • Appoint and monitor the ESOP trustee
  • Determine ESOP contributions
  • Determine and manage repurchase liability
  • Direct trustee as required

Trustee duties include:

  • Act as custodian for plan assets and manage liquid assets
  • Receive contributions, distributions, and dividends
  • Make ESOP loan payments
  • Process/oversee participant distributions
  • Determine fair market value of shares held by ESOP
  • Vote ESOP shares
  • Monitor board of directors
  • Be an informed "shareholder"
  • Ensure ESOP complies with laws, regulations, and guidelines

This article is based on a presentation by Neil Brozen of Ventura Services at the NCEO Fall Forum.