Fiduciary Responsibility

Fiduciary Responsibility and Repurchase Liability

Who is an ESOP Fiduciary?
An ESOP fiduciary is any person with discretion over the management or administration of an ESOP or who exercises any control over the plan’s assets. “Named fiduciaries” are individuals such as the ESOP trustee, or any other person or committee designed in the plan document as responsible for making investments in company stock.

Plan fiduciaries are required under ERISA to act prudently and solely in the interest of plan participants. Some of the most important responsibilities of an ESOP fiduciary are: approving the valuation of the stock, protecting the interests of plan participants in ESOP transactions, and approving all transactions affecting the ESOP’s ownership interest.

The Risks of being an ESOP Fiduciary
Internal fiduciaries for ESOPs have substantial legal responsibility and with that responsibility comes risk. ERISA makes fiduciaries personally liable for breaching their fiduciary duties. Therefore, individuals serving as trustees or other fiduciaries of an ESOP face significant personal exposure for breach of fiduciary duty. By making sure an ESOP complies with the law and the plan document, fiduciaries can protect themselves against costly legal problems, and simultaneously build trust and credibility for employee ownership among plan participants.

ESOP Fiduciaries and Repurchase Liability
As ESOPs have matured, the repurchase liability has become a more significant use of corporate cash, and thus the issue of repurchase liability has come to the forefront for many ESOP trustees and corporate boards of directors. As a result, trustees and boards have started to take a more proactive approach to strategic planning, to fulfill their shared duty to maximize shareholder value.

Even for an ESOP company with a strong balance sheet and where cash needs are not immediate, the board of directors and ESOP trustee will benefit from performing strategic assessments to anticipate and properly plan for future large cash flows related to repurchase liability. Better to be prepared than to be caught off-guard when suddenly faced with substantial near-term cash requirements. By neglecting to plan for the potential large cash outflows related to repurchase liability until the last minute, the company may be forced to incur debt to fund the cash requirements, which could be dilutive to all shareholders, and may not be available at desirable terms. By planning in advance, the corporation can identify potential sources of financing well in advance of the actual cash needs, or modifying its repurchase funding strategy to best manage and fund the repurchase liability. If the corporation decides to secure debt as part of its strategy, to do so without such urgency allows the corporation to negotiate the most favorable terms and minimizes potential dilution to the ESOP and other shareholders.

ESOP trustees and boards of directors who work together on strategic, advanced planning and who take action when appropriate are a key ingredient to a sustainable ESOP and successful corporation.