The Fiduciary and the Controlling Stockholder ESOP
Although each ESOP participant beneficially owns a minority ownership interest, the actual owner of the company stock is the employee stock ownership trust (or ESOT). If the ESOT is a controlling stockholder, then the ESOT would enjoy all the rights of a controlling stockholder. These controlling stockholder rights may include the following:
- elect the board of directors, who in turn elect the corporate officers,
- approve by-law changes, mergers, acquisitions, or the sale of the business or a significant asset, etc.
- the purchase or sale of stock of the ESOT
It is the author’s recommendation that a trustee of a controlling ESOT (1) obtain regular (monthly or quarterly) status updates from the CEO or CFO of the business and (2) take an active role when it becomes apparent that business conditions have deteriorated. Some examples of challenges may include industries facing transformative technologies impacting scale or being negatively impacted by cyclical headwinds, regulatory developments, financing limitations and pandemics to list a few. By policy, institutional trustees of ESOPs do not serve on the board of directors or accept officer level appointments with ESOP companies. This is because of the inherent conflict of interest discussed earlier. Practically speaking, trustees do not have the time or expertise to manage the company owned by the ESOT. The expertise of the ESOP trustee relates to an employee benefit retirement plan created to provide eligible participants (and their beneficiaries) with future retirement benefits through the growth of the value of the company stock.
- ERISA requires that a “fiduciary shall discharge his duties with respect to the plan solely in the interest of the participants and beneficiaries for the exclusive purposes of: (1) providing benefits to participants and their beneficiaries; and (2) defraying reasonable expenses of administering the plan…”
- Furthermore, a fiduciary must discharge its duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man 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.”
- This statutory language can be quite intimidating. The following Parts III through V will describe the practical implications of ERISA’s charge to an ESOP fiduciary.