Roles and Responsibilities of the ESOP Trustee and Company Fiduciaries

Transcription

1 Roles and Responsibilities of the ESOP Trustee and Company Fiduciaries ESOP Association Southwest Chapter Spring Conference March 24, 2017 Allison Wilkerson McDermott Will & Emery Dallas, Texas Neil M. Brozen Ventura ESOP Fiduciary Services Minneapolis, MN

2 ESOP Trustee [Shareholder] Appointed by the Board Elects the Board Approves certain major transactions Oversees the valuation process and sets the annual share value Board of Directors Oversees the corporate business via board meetings and board committees Appoints the officers Creates and appoints committee members ESOP Committee [ESOP Committee may be an ERISA fiduciary] Audit Committee Compensation Committee Monitors appointed ERISA fiduciaries Management Operations of the business Committees Delegated duties 2

3 Board of Directors Duty of Loyalty Duty of Care Duty of Obedience Business Judgment Rule Applies!! ERISA Fiduciaries Duty of Loyalty Duty of Care Other Responsibilities Follow plan documents Directed Fiduciary requirements Avoid prohibited transactions Diversification requirement (ESOP exemption) No Best Efforts Rule! 3

4 Board of Directors is charged with appointing plan fiduciaries (e.g., the trustee, ESOP Committee, plan administrator) Cannot do so haphazardly Properly Appoint Fiduciaries Carefully evaluate candidates and document the selection process Verify that candidates qualifications are consistent with their duties Require that those to whom legal responsibility has formally been delegated assume an active role and exercise that responsibility Provide training to internal fiduciary candidates Trustee is not permitted to delegate Trustee duties (co-trustee relationship) 4

5 Grow shareholder value Set corporate strategic goals and business strategy Monitor corporate performance against established goals and strategy Establish corporate standards and conduct Appoint board committees Monitor committee activity Appoint and monitor officers Evaluate CEO (and other executive) performance Determine management compensation Facilitate succession planning Monitor risk management Balance the interests of corporate constituents Evaluate and approve significant corporate transactions 5

6 Appoint and monitor ESOP Trustee Direct trustee per plan document While directed action may be limited on an annual basis, the board must make sure it provides direction in those instances where a directed trustee is required to act (e.g., election of the members of the board of directors) Plan administration responsibility Determine ESOP contributions Oversee ESOP distribution process Adopt, amend and/or terminate ESOP Evaluate repurchase liability May be delegated to a plan committee Declare dividends/distributions to be paid to shareholders 6

7 Maintain custody of plan assets Updated stock certificates for released shares Manage liquid assets Investment requirements? Is the trustee directed? Receive contributions and dividends/distributions Make ESOP loan payments Oversee participant distributions Based on plan administrator direction Determine fair market value of shares held by ESOP Vote ESOP shares May be directed Monitor board of directors Must properly elect the board of directors 7

8 Board of Director meetings Trustee may attend as guest/observer Trustee duty to monitor directors Annual Valuation Update Repurchase Liability Corporate obligation Board and management responsibility Trustee should be aware of assumptions and conclusions and understand obligation s impact on the corporation s competing needs for cash and the valuation process Board directs course of action to fund the responsibility 8

9 Valuation Issues - Introduction The Board of Directors and the Trustee must know the valuation requirements Fair Market Value The Trustee is the responsible party for setting value Proper Process: Proper selection of the Appraiser Proper information provide to the Appraiser Review the report Ask questions Review the valuation approach(es) Review and question methodology used to determine value Document the review process 9

10 Board Role in the Valuation Process Under ERISA, the Board has a duty to: Select and appoint a qualified trustee or trustees Understand how company stock is valued Work with management to provide appropriate and complete information to the ESOP trustee and the valuation firm Careful preparation and review of the projections Monitor the actions of the ESOP trustee (and any other plan fiduciaries it appoints) Understand repurchase obligation considerations Confirm process is adequate Review final valuation report Summary of annual valuation Reasoning for valuation 10

11 Trustee Role in the Valuation Process Assets of trust must be valued at least annually (or more frequently if Plan Document requires it) ESOP Trustee engages the Valuation firm Valuation firm reports to the Trustee not the Company ESOP Trustee ultimately determines value Valuation firm recommends value to trustee Understand and question valuation firm recommendations and analysis Confirming adequacy, accuracy and reasonableness of company financial data provided to valuation firm Understanding ESOP repurchase obligation Communication with Board and participants 11

12 Election of new board members Know the process! Board identifies and interviews candidates Board recommends candidates to Trustee Trustee assesses candidates Trustee votes for director Evaluation of executive officer performance Board always reviews performance of the CEO but may review other C suite officers Evaluates performance on an annual basis Makes compensation decisions based on performance Trustee monitors board s actions vis-à-vis officers Review of potential corporate transactions 12

13 Company underperformance Evidenced by missed projections/not attaining budget Board of director oversight of company and management of company performance against corporate goals and strategy Trustee responsibility for questioning the board Process is important! Change in operations Actions taken in the event of a change in operations Lost major customer Technology changes Designing an evolving compensation program What occurs when a compensation program becomes obsolete Ensure continued motivation for employees Conflicts of Interest Board of directors Inside trustee Multiple hat issues 13

14 QUESTIONS? Allison Wilkerson McDermott Will & Emery Dallas, Texas Neil M. Brozen Ventura ESOP Fiduciary Services Minneapolis, MN