Presented by: Leah Singleton Hall Benefits Law 270 Carpenter Drive Suite 325 Atlanta, Georgia (678)

Transcription

1 Presented by: Leah Singleton Hall Benefits Law 270 Carpenter Drive Suite 325 Atlanta, Georgia (678)

2 What do you have to tell employees? What information can I keep from employees? What should you tell employees? What are the legal risks of communications to employees? 2

3 While company stock is held in the ESOP, is owned by the trust of the ESOP trust The ESOP Trust is the direct owner of company stock and is the only party that has a right to financial information ESOP participants: are beneficial participants in the ESOP trust do not have an automatic right to participant in company management decisions do not have a right to make decisions as to how the company should be run on a day-to-day basis 3

4 WHAT DO YOU HAVE TO TELL EMPLOYEES? 4

5 Summary Plan Description (or SPD ) Summarizes the key features of the ESOP, provides information about those entrusted to administer the ESOP, and other ERISA required content Must furnish the SPD to an employee no later than 90 days after becoming a participant in the ESOP. Must be updated and distributed every 5 years If the ESOP is amended or restated, a revised SPD must be distributed within 210 days following the close of the plan year in which the restatement or amendment becomes effective. Instead of a new revised SPD, a Summary of Material Modifications (or SMM ) describing the changes to the ESOP can be provided within 210 days following the close of the plan year in which the amendment becomes effective. 5

6 Summary Annual Report (or SAR ) Summary of the information contained in the ESOP s annual report (Form 5500) filed with the Department of Labor each year SAR provides a summary of financial transactions, the number of participants, and other plan-related information Must be provided by the end of the 2 nd month following the filing deadline (including an extension, if granted) for the ESOP s annual report 6

7 Individual Benefit Statements Participants must receive an annual statement showing the fair market value of their accounts in the ESOP, including the fair market value of their shares and any other assets in their ESOP accounts Must receive a vested percentage of their account Additional disclosures are required when participants have the right to receive a distribution of the ESOP plan benefits or when they have a diversification right upon reaching age 55 with 10 years of service 7

8 Advisors Services and Fees Disclosure of fees to ESOP participants may be required if the ESOP includes participant-directed investments (such as a segregation of participant accounts or diversification payments going to investment options in the ESOP rather than another qualified plan) Typically, ESOP expenses are not paid by or from the plan but by the employer 8

9 For a private company, generally the ESOP trustee votes the ESOP shares held in the ESOP trust Pass through voting means that the ESOP participants be allowed to direct the trustee to vote the shares in their accounts. ESOP plan document may contain language about ESOP trustee voting all shares like the majority or voting onefor-one based on participant direction. 9

10 The right to vote on major corporate events must be passed through to ESOP participants Merger, Consolidation, Recapitalization, Liquidation Sale of substantially all corporate assets Dissolution Reclassification ***No voting rights on sale of stock for cash 10

11 Documents that must be provided upon request: ESOP plan and trust documents Summary Plan Description Participant s beneficiary designation ESOP s latest annual report on Form 5500 including schedules Upon a written request of these documents by a participant, the copies must be provided within 30 days. The company can charge a reasonable fee to cover the cost of copying and providing the documents The Department of Labor can impose per-day late fee for not providing participants with certain documents they request and have a right to receive or review under ERISA. 11

12 WHAT INFORMATION CAN I KEEP FROM EMPLOYEES? 12

13 Other than the ERISA required disclosures, it is up to the company to decide how much or how little information to provide to ESOP participants No legal requirement to provide ESOP participants with copies of financial statements or make them available for inspection by ESOP participants No formal requirement to provide or to make available to ESOP participants a copy of the ESOP appraisal or valuation 13

14 Financial Statements Officer Salaries Ownership structure Outstanding equity-based awards (e.g., stock appreciation right awards, restricted stock unit awards) Company tax returns Real estate or equipment leases Information about how many shares are allocated to participants (other than the particular participant requesting information) ESOP appraisal report or valuation (which may contain sensitive financial information about company and comparisons to its competitors) 14

15 YES Disclose Account balance Vested percentage Per share value of stock NO Do not have to disclose Financial statements Salaried of officers Valuation of company 15

16 WHAT SHOULD I TELL EMPLOYEES? 16

17 Sharing financial information or explaining how the stock was valued can be a very powerful management and motivation tool Strategic sharing of financial performance can help management and productivity The ESOP valuation can be a powerful tool for shareholders and management to understand what makes the company valuable If the information disclosed to participants enough to effectively communicate employee ownership and serve as an incentive for enhanced performance? If some employees still don t understand employee ownership, are the goals of the program really being achieved? Ownership does not mean unlimited access to all business information and total transparency The sheer volume of information shared by the company reinforces the idea of transparency and makes it harder for anyone to claim that there must be a hidden agenda. 17

18 When to communicate: Company Messages: Newsletter, Annual meetings, CEO messages, Huddles, Manager Training and Retreats, and Employee ownership month Employment events: interview, orientation, reviews, eligible to participate in ESOP, full vesting in ESOP, diversification at age 55 with 10 years of service, and retirement age ERISA disclosure requirements: mailings, intranet, FAQs, employee hotline Special Events: rollout of ESOP, ESOP/Company milestones (loan repaid, anniversaries, threshold attainment), big news, management transaction, employee reactions While potential growth is discussed, ensure there are no promises. Acknowledge risk but link risk and reward. 18

19 The purpose of an ESOP Communication Committee helps implement strategic vision of employee ownership through communication and education Not an ERISA fiduciary (unless actions dictate otherwise) Train employees and advise management by communicating to employees that they are shareholders with a stake in the company s growth and future The goal is to lead employees to act as owners of the company Provide proactive and education materials that are user-friendly Form a charter for the committee and even have employees apply or be nominated to be on the committee 19

20 WHAT ARE LEGAL RISKS OF COMMUNICATION TO EMPLOYEES? 20

21 Improper valuations Misuse of assets (such as moving profit sharing funds into an ESOP) Broken promises (such as changing the schedule for distribution of benefits) Excessive management enrichment to the detriment of plan participants Accepting valuations that maximize the price the ESOP pays sellers by making only the most favorable assumptions Failure of the trustee to bargain aggressively with sellers to provide the interest of ESOP participants 21

22 Should the company disclosure business information to a participant who sold his shares of company stock he held in the ESOP after resigning? ERISA generally does not require plan fiduciaries to disclose non-public business information to plan participants. The 11 th U.S. Circuit Court of Appeals in Lanfear v. Home Depot found there is no duty to disclosure business information to plan participants even if that information could be relevant to a plan participant in deciding what to do with his or her stock. Hill v. BellSouth Corp said special circumstance will trigger heightened obligations to disclose since fiduciaries must act in the best interest of participants 22

23 Leah Singleton Director of Legal Operations and Managing Attorney HALL BENEFITS LAW 270 Carpenter Drive, Suite 325 Atlanta, Georgia (678)