Which Hat Am I Wearing?
The quandary of the internal ESOP trustee
Ben F. Wells
Dinsmore & Shohl, LLP
801 Pennsylvania Ave, NW
Washington, DC 20004
(202) 372-9119
255 E 5th St, Suite 1900
Cincinnati, Ohio 45202
(513) 977-8108
Megan Koontz
Director of Human Resources
Quick Solutions
440 Polaris Parkway
Suite 500
Westerville OH 43082
Phone: (614) 896-2004
Fax: (614) 846-4457
E-mail: mkoontz@quicksolutions.com
• quan·da·ry noun \kwän-d(ə-)rē\ plural
quan·da·ries
• a state of perplexity or doubt
Internal trustees often fill many roles:
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Employee
Director
Officer
Committee member
Plan administrator
Trustee
When making decisions, its important
to know which “hat” you are wearing
Why is this?
• Each role has different:
– Duties
– Responsibilities
– Legal standards
– Liability
How is an ESOP “governed”?
• (Insert diagram)
Who runs a corporation?
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Shareholders elect
Directors, who choose
Officers, who hire
Employees
Who runs an ESOP?
• Key: look at plan documents
– Plan
– Trust
– Board actions
• Key players
– Trustee
– Board
– Administrative committee
Company (Directors)
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Establishes the ESOP
Adopts amendments
Chooses trustee and plan administrator
Makes contributions
Terminates plan
Trustee
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Legal owner of ESOP shares
Elects directors
Votes shares
Determines value
Buys and sells shares
Makes distributions
Plan Administrator
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Tracks account balances
Determines vesting
Manages allocations
Instructs trustee
Legal Standards
• Directors
– Governed by state corporation law
– Protected by “business judgment rule”
– Must act
• In good faith
• In the interests of the corporation
• With ordinary care
Legal Standards (Directors)
• Burden is on plaintiffs to show a breach of
duties
• “Clear and convincing evidence” standard
• Primary duty is to shareholders…BUT
Legal Standards (Directors)
• Directors of an Ohio corporation may
consider:
• The interests of the corporation’s employees, suppliers,
creditors, and customers;
• The economy of the state and nation;
• Community and societal considerations;
• The long-term as well as short-term interests of the
corporation and its shareholders, including the
possibility that these interests may be best served by
the continued independence of the corporation.
Legal Standards (Trustees and Plan
Administrator)
• ERISA fiduciary duties
–Prudence
–Exclusive purpose
–Follow plan documents
–Follow ERISA
• Highest duties applicable under the
law
Duties (Trustees)
– Common duties of trustees include:
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Voting shares
Determining value of company stock
Electing Board of Directors
Determining plan investments
Paying reasonable plan expenses
Review and monitor performance of the Board
Purchase and sale of shares
Other trust administrative duties
Duties (Board)
– Common Board duties include:
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Selection of officers
Establishment of ESOP
ESOP amendments
ESOP termination
Determining ESOP contribution
Selecting and monitoring trustee and plan
administrator
• Review and negotiation of significant corporate
transactions
• Determining officer compensation
Duties (Plan Administrator)
– Common duties include:
• Determining eligibility and vesting
• Determining allocations of employer contributions and
trust earnings
• Tracking ESOP account balances
• Complying with ERISA reporting and disclosure
obligations
• Instructing trustee (if specified in plan documents)
– Voting shares
– Other matters
Which hat am I wearing?
– When looking at a decision
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Examine the decision to be made
Determine who is responsible
Think about what duties are owed, and to whom
Apply appropriate standard of care
Document process and decision
Seek outside advice when necessary