20 Misconceptions about Fiduciary Responsibility and Liability

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20 Misconceptions about Fiduciary Responsibility
and Liability

• Ben Wells Dinsmore Shohl LLP 513-977-8108
• John Banasek Prairie Capital Advisors, Inc.
  630-443-9933
• Bill McIntyre Ohio Employee Ownership Center
  330-672-3028
• GUEST EXPERTS
• Dave McCoy Business Valuations, Inc.
  513-522-1300
• Tina Fisher Principal Financial Group
  330-836-6220
• Jeff Gelburd Marsh USA, Inc. 717-234-3333

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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 companys 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 its 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

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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 advisors
• 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
TrusteesNonManagement 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

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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

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18 The Companys 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

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19 Either the Fidelity Bond, DO 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 (DO) 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 DO insurance does not contain
• a major shareholder exclusion (ESOP)
• a specific ESOP exclusion

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20 Fiduciaries can fulfilltheir fiduciary
responsibilityby following the termsof 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