Which Hat Am I Wearing?The quandary of the internal ESOP trustee

Ben F. WellsDinsmore & Shohl, LLP

801 Pennsylvania Ave, NWWashington, DC 20004

(202) 372-9119

255 E 5th St, Suite 1900Cincinnati, Ohio 45202

(513) 977-8108

Megan KoontzDirector of Human Resources

Quick Solutions440 Polaris Parkway

Suite 500Westerville OH 43082

Phone: (614) 896-2004Fax: (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:

• 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?

• 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)

• Establishes the ESOP• Adopts amendments• Chooses trustee and plan administrator• Makes contributions • Terminates plan

Trustee

• Legal owner of ESOP shares• Elects directors• Votes shares• Determines value• Buys and sells shares• Makes distributions

Plan Administrator

• 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:• 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:• 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• 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