20 Misconceptions about Fiduciary Responsibility and Liability

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1 20 Misconceptions about Fiduciary Responsibility and Liability Ben Wells Dinsmore & Shohl LLP John Banasek Prairie Capital Advisors, Inc. 630 Bill McIntyre Ohio Employee Ownership Center GUEST EXPERTS Dave McCoy Business Valuations, Inc Tina Fisher Principal Financial Group Jeff Gelburd Marsh USA, Inc

2 #1 A person NOT named as a fiduciary is NOT a fiduciary. If a person performs fiduciary functions, the person is a fiduciary. A fiduciary is anyone with discretionary authority or control over management and/or administration of the Plan or Plan assets or who provides investment advice for a fee.

3 #2 Board of Directors does NOT have fiduciary responsibility for the ESOP Board of Directors generally selects & appoints ESOP fiduciaries that is a fiduciary decision by the Board

4 #3 Management hires the ESOP Trustee No the Board of Directors usually has the responsibility to select the ESOP Trustee Management may assist in the process, but it is a Board decision

5 #4 An ESOP fiduciary must act solely for the benefit of the company s s employees No ESOP fiduciaries must act solely for the benefit of ESOP PARTICIPANTS and their beneficiaries ESOP fiduciaries have NO duty to act for the benefit of employees

6 #5 Management hires the ESOP independent valuation advisor No The ESOP independent valuation advisor is hired by the ESOP Trustee

7 #6 The independent valuation advisor sets the price for ESOP shares of company stock No the independent valuation advisor is only an advisor Independent valuation advisor is NOT a fiduciary ESOP Trustee determines the stock price Valuation report is a recommendation to the Trustee it can be accepted or rejected

8 #7 TPA (Third Party Administrator) has fiduciary responsibility to the ESOP The TPA is a recordkeeper who does not have discretionary authority or control over the Plan or Plan assets TPA merely assists the Plan Administrator named in the Plan TPA is NOT a fiduciary

9 #8 The ESOP Administrative Committee has fiduciary responsibility only if the Trustee is a directed Trustee ESOP Administrative Committee has responsibility for: Interpreting the Plan Establishing policies and procedures to implement the Plan It HAS fiduciary responsibility for the ESOP

10 #9 A Not For Sale Resolution by the Board of Directors means the Company can ignore offers to purchase the Company Regarding the ESOP, the Resolution is worthless If followed, it may be a breach of fiduciary responsibility

11 #10 An ESOP Trustee MUST accept any offer to purchase ESOP shares for greater than the current appraised ESOP stock price No several reasons why it s NOT true: Circumstances have changed Value for strategic buyer is not the same as Fair Market Value for ESOP would require a new and different appraisal Other items may be involved in purchase other than the purchase of ESOP stock Compare total offer to underlying intrinsic value of the ESOP shares

12 #11 Pass-through voting by ESOP Participants is required on any merger or acquisition Merger YES Acquisition NO Unless the acquisition involves a merger

13 #12 - Pass-through voting by ESOP Participants is required on a sale of ESOP stock Sale of ESOP shares NO, unless a merger is involved Sale of substantially all of the Company assets - YES

14 #13 A person with a conflict of interest in a transaction CANNOT serve as ESOP Trustee for that transaction No it is NOT illegal May not be smart May invite lawsuits BUT it is NOT illegal

15 #14 Trustees fulfill their fiduciary responsibility re ESOP stock price by hiring a qualified independent valuation advisor Hiring a qualified, competent, experienced, independent ESOP valuation advisor is a good start, HOWEVER Trustees must understand and agree with the independent valuation advisor s: Assumptions Methodologies Trustees must review the valuation report draft to identify any mistakes Maintain a permanent record file of all reviews

16 #15 Only MBAs/CPAs can be ESOP Trustees; NonManagement employees do NOT qualify to be Trustees ESOP Trustee can be a committee Someone on the committee should be able to read and understand financial statements No requirement that everyone serving as an ESOP Trustee be a financial expert Trustee MUST be knowledgeable of the responsibilities of being a Trustee Good heart & empty head is NOT sufficient

17 #16 Business judgment doctrine protects fiduciaries; therefore, they should NOT document their process PROCESS is the key Follow process of due diligence Ask questions Document everything

18 #17 Fiduciary liability is a company liability, NOT a personal liability Fiduciary liability IS a personal liability Fiduciaries may have to pay any judgment against them out of their own pocket Yes, you could lose your house

19 #18 The Company s indemnification clause protects fiduciaries from personal liability Exceptions in the indemnification clause may exclude protection if the fiduciary failed to fulfill fiduciary responsibility gross negligence and/or willful misconduct is an industry standard If the Company is out of business, the indemnification may not be worth much

20 #19 Either the Fidelity Bond, D&O Insurance, or Fiduciary Insurance will protect fiduciaries from personal liability Fidelity or ERISA Bond protects the Plan, not the individual, for theft of Plan assets Directors & Officers (D&O) Insurance contains an ERISA exclusion: no coverage for breach of fiduciary duty involving qualified ERISA plans Fiduciary Insurance often excludes ESOPs Make sure: your fiduciary insurance covers ESOPs your D&O insurance does not contain: a major shareholder exclusion (ESOP) a specific ESOP exclusion

21 #20 Fiduciaries can fulfill their fiduciary responsibility by following the terms of the ESOP Plan Document Usually Yes, but not always ERISA overrules the Plan If following the Plan would violate ERISA, then the fiduciary must ignore the Plan and comply with ERISA