The ESOP as the Majority Stockholder – Part V

Colin M. Henderson ­ Spring 2003

The ESOP Fiduciary and a Business Failure

At the end of the day, if the ESOP fiduciary, in good faith, determines that the ESOP’s investment is imprudent and is being jeopardized by the failures of the board of directors, its management, and/or its business plan, then the fiduciary should begin a process which may result in the replacement of the board of directors or management. In doing so, the fiduciary must see that qualified replacements are engaged who are capable of reviving the employer business.

If company management is not the problem – such as when changes in technology occur, or when there are adverse changes in the industry economics – the ESOP fiduciary may direct management (or other qualified professionals) to liquidate (1) the business or (2) the ESOP’s interest in the business.

In the event of such a business failure, the objective of the fiduciary is to achieve the best financial result possible for the ESOP, its participants, and its beneficiaries.

There are no published guidelines on how this liquidation process should be conducted. Also, there can be no assurance that the effort will result in any residual value flowing to the shareholders.

Summary and Conclusion

Over the past 30 years, ESOPs have evolved in their use as a business succession planning tool. In recent years, ESOPs are more frequently becoming either (1) the controlling owner or (2) the sole shareholder of their sponsoring company.

If vigilance is the mantra of the ESOP fiduciary in both private and public company plans, a heightened level of vigilance is in order for the ESOP fiduciary where the ESOP is the controlling shareholder of the employer corporation.

The independent ESOP fiduciary of a controlling ownership ESOP should understand the pro-active nature of the investigations, analyses, and potential actions that need to be undertaken in order to protect the investment for the plan participants.

Part IV