Colin M. Henderson ­ Spring 2003

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). Under general corporate law, the ESOP trust is the stockholder. If the ESOT is a controlling stockholder, then the ESOP would enjoy all of the rights of a controlling stockholder. These controlling stockholder rights include the following:

to elect the board of directors, who in turn elect the corporate officers,

to approve by-law changes, mergers, acquisitions, or the sale of the business or of its assets, and

etc.

It is the author’s recommendation that fiduciaries of a controlling ownership ESOP should (1) increase their surveillance of the business and (2) take an active (or even pro-active) approach in coping with a failing business.

Most independent trustees of ESOPs do not serve on the board of directors or accept officer level appointments at the employer corporation. This is because of the inherent confilct of interest that may arise in such instances. Practically, independent trustees typically do not have the industry expertise to direct or manage the employer corporation.

The duty and expertise of the independent trustee relates to the ESOP, an employee benefit retirement plan, created to provide eligible participants (and their benefactors) with future retirement benefits.

That being said, the following discussion should convince any fiduciary who understands the perils of business that serving as a fiduciary to an ESOP that owns a controlling ownership interest is no joy ride.

Statutory Authority Regarding ESOP Fiduciary Responsibilities

ERISA(1) 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…”(2)

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.”(3)

This statutory language can be quite intimidating. The following sections will describe the practical implications of ERISA’s charge to an ESOP fiduciary

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Part I   |  Part III