LAS VEGAS CONFERENCE
November 8-9, 2012
Las Vegas, NV
Michael R. Holzman
Dickinson Wright PLLC
Daniel M. Reser
Patrick De Craene
Fiduciary Services, Inc.
GreatBanc Trust Company
The objectives of this session are:
 Overview of the duties and responsibilities as an
ESOP Fiduciary/Trustee
 Discuss practical situations and “best practices”
 Share experiences
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 Anyone who has discretion or control over Plan Assets:

Plan Sponsor/Board of Directors: appoint/remove other fiduciaries;
oversight
 Trustee (directed or discretionary): Record owner of shares held by
ESOP; must act for the “exclusive benefit” of participants; votes shares
(but may be directed as to voting)
 ESOP Committee (if any): interprets plan; reviews claim appeals; may
direct trustee as to how to vote shares; may be Plan Administrator also
 Plan Administrator/Plan Committee
 Valuation Firm: annually appraises ESOP shares; may perform
valuation of, or financial advisory service for, specific transactions? (Are
they a “fiduciary” and are they “independent”)
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 Individual Internal Trustees
 Frequently officers/employees of the Company
 Pros and Cons
 Independent Trustees
 Could be an independent individual, however, Institutions usually fill
this role (banks, trust companies, etc.)
 Limited transactional vs. ongoing
 Pros and Cons
 Directed Trustees
 Receives direction from insider fiduciaries or independent fiduciaries

Similarities and Differences
 Responsibilities
 Risks
 Judicial deference
 Duties and responsibilities of the “Fiduciary” are defined
in Plan and Trust documents
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 A Fiduciary must:
 Discharge duties solely in the interests of the Plan
Participants
 Discharge duties with care, skill, prudence and diligence
 Under the circumstances then prevailing
 That a prudent person acting in a like capacity and familiar with such
matters would use
 In the conduct of an enterprise of a like character and with like aims
 Act in accordance with plan documents
 Insofar as such documents are consistent with ERISA and other
applicable law
 Steer clear of prohibited transactions
 Related-party sales
 Loans
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Plan Sponsor/Administrator
Trustee
Purchases and Sales of Company Stock
Invest trust assets
Determine value of company stock
Repurchase liability
Executive Compensation
Actions of Prior Fiduciary
Vote Shares held within ESOP
Process Distributions
Non-routine Events
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 Prudence and the exclusive benefit rule
 Is the purchase a prohibited transaction?
 Conduct Due-Diligence Investigation
 Financial matters (Adequate Consideration)
 Legal matters
 Consider impact on existing shares held by the ESOP

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Negotiate Price – Adequate Consideration
Fairness
Documentation
Role of Conflicts
Highly Scrutinized
Plaintiffs’ Bar
DOL
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 Prudence and the exclusive benefit rule
 Investment Policy Statement
 Review of risk and return Characteristics
 Duty of Diversification
 Trustee
 Plan Administrator (if the Trustee is Directed)
 Investment Advisor
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 Determining Value/Stock Price – The Trustee is responsible.
 What should the Trustee do with the valuation report?
 Process for accepting the report from valuation firm
 Is appraiser independent?
 Review the report
 Ask questions
 Review the approaches
 Unique circumstances
 Have questions been answered and documented?
 Need to understand the valuation
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 Overall solvency of the Company
 Necessity of the Trustee to discuss issues with management
 Repurchase Liability
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 Plan Sponsor must meet the obligation
 Internal versus External studies
 Sustainability
 Effect on Valuation
 Cash Flow
 Balance Sheet
 What happens when you fail to plan?
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 Board of Directors
 Fair and Reasonable
 Trustee Duty to monitor Board actions
 Dilutive effects of equity compensation
 409(p)
 Effect on valuation - Delta Star, Inc. vs. Patton 76 F. Supp.
2d 617 (W.D. Pa. 1999); Johnson vs. Couturier 2009 WL
2216805 (9th Cir. July 27, 2009)
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 Duty to Investigate Barker v. American Mobile Power
Corp. (9th Cir.)
 Department of Labor view, DOL 1976 Advisory Opinion
 In Fernandez v. K-M Indus. Holding Co. (9th Cir.), the
Court relied upon a Department of Labor opinion and the
common law of trusts and held that while the Successor
Trustee could not be held vicariously liable for the breaches
of fiduciary duty by Moore, it was potentially liable under
§1005 for its failure to remedy the alleged breaches of
fiduciary duty that took place before it was appointed trustee
if it failed to act despite its knowledge of the breaches
 Co-fiduciary liability Silverman v. Mutual Benefit Life
Insurance Co. (2nd Cir.)
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 Trustee Votes
 Is the Trustee directed?
 Investigation and documentation
 Pass-Through Vote to Participants
 Merger, consolidation, liquidation, sale of substantially all
company assets, “organic changes”
 Voluntary Participant Voting for Board of Directors
 Adequacy of information provided to participants
 Ensure Voting Safeguards, confidentiality
 Potential for Conflicts
 Voting for yourself
 Should you abstain?
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 Recordkeeping Trust/Accounting

Payment of the ESOP loan
 Notify the Company of pending loan payments due
 Collect the loan payments from the company and make
the necessary payments to the bank or back to the company
(DOL)
 All loan payments need to be run through the trust even
if the loan is from the company (IRS and DOL)
 Working with TPA, calculate the release of the shares as
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per the loan documents and make sure that all
covenants have not been violated (DOL)
 Allocations/5500/Annual Audit:
 Who should check the Allocation Reports to insure that they are
correct?

Verify the release of shares

Spot check the allocations

Verify the number of shares on the reports to the Trust

Statements for both the allocated and unallocated shares
 Look at the results of the 409(p) test for Sub S ESOPS. Is there a
non-allocation year?
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 Distributions:
 The Trustee makes the distributions to the plan
participants as directed by the Plan Administrator.

The distributions should be verified to the allocation
reports before checks are issued.

Prepare the check or stock certificates (if shares are to
be paid out).

Compute income tax withholding. Prepare the
appropriate tax reporting forms and send withholding
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timely to the IRS.
 If the Company purchases distributed ESOP shares, is it a
Fiduciary decision?
 If the ESOP purchases distributed ESOP shares, is it a
Fiduciary decision?
 What if Company offers to repurchase ESOP shares from
the ESOP so that the ESOP can distribute cash in lieu of
shares?
 If stock is sold by the ESOP to the Company, the sale is a
party-in-interest transaction and must be done at or below fair
market value as determined at time of the sale, not as of last
annual valuation date.
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 Sale of Company
 Asset sale or merger

Stock sale
 Acquisitions of other companies
 Refinancing of ESOP loan balance(s)
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 Liability for Breach of Duty
 ERISA Section 409(b)
 Penalties for Violation of Prohibited Transaction Rules
 Indemnification
 Liability for Breach of a Co-Fiduciary
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 Review indemnification agreements
 Review level of ERISA fiduciary liability coverage for
adequacy; take defense costs into account
 Board of Directors – annual review of actions of ESOP
Trustee (including stock valuations); seek independent,
competent advice of executive compensation and board fees
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Michael R. Holzman
Daniel M. Reser
Patrick J. De Craene
DICKINSON WRIGHT PLLC
1875 Eye Street NW,
Washington, DC 20006
Tel: 202-659-6931
mholzman@dickinsonwright.com
FIDUCIARY SERVICES, INC.
369-B Third Street, #543
San Rafael, CA 94901-3581
Tel: 415-482-9513
Fax: 415-276-1736
dreser@fiservinc.com
GREATBANC TRUST COMPANY
801 Warrenville Road Suite 500
Lisle, Illinois 60532
Tel: 630-810-4500
Fax: 630-810-4501
pdecraene@greatbanctrust.com