The ESOP as the Majority Stockholder – Part V

Colin M. Henderson — January, 2021

The ESOP Fiduciary and a Business Failure

If the ESOP trustee, in good faith, determines that the ESOP’s investment is imprudent and is being jeopardized by what appear to be failures of the board of directors, its management, its business plan or model, then the fiduciary should begin a conversation that will bring these observations to management’s attention. Typically, management and the board are aware of the looming difficulties and have begun processes to constructively address them. Now that the trustee is part of the conversation it is not difficult to remain abreast of management’s initiatives.

If company management is not the problem, as for example changes in technology resulting in changes in industry economics, the trustee may find that it is participating in a conversation regarding an orderly liquidation or sale of the business, sale of a division of the business which is not performing, or how planned investments will secure the future.  

If members of management are the problem, then the trustee will encourage the board of directors to make a change and select a qualified replacement capable of reviving the business in jeopardy.  In any event 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 trustee guidelines on how this 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 40 years, ESOPs have evolved in their use as a business founder liquidity event into a multi-generational employee ownership strategy. ESOPs are more frequently becoming either the controlling owner or the sole shareholder of their sponsoring company. If vigilance is the mantra of the ESOP trustee in both private and public company plans, a heightened level of attentiveness is in order for the ESOP trustee where the ESOT is the sole shareholder. The ESOP trustee of a 100% ESOP should understand the pro-active nature of its investigations, analyses, documentation, and potential actions that need to be taken to protect the investment for plan participants.

Part IV