20 Misconceptions about Fiduciary 20 Misconceptions about Fiduciary Responsibility and LiabilityResponsibility and Liability

Ben Wells – Ben Wells – Dinsmore & Shohl LLP Dinsmore & Shohl LLP – 513-977-8108– 513-977-8108

John Banasek – John Banasek – Prairie Capital Advisors, Inc.Prairie Capital Advisors, Inc. – 630-443-9933 – 630-443-9933

Bill McIntyre – Bill McIntyre – Ohio Employee Ownership CenterOhio Employee Ownership Center – – 330-672-3028 330-672-3028

GUEST EXPERTSGUEST EXPERTSDave McCoy – Dave McCoy – Business Valuations, Inc.Business Valuations, Inc. – – 513-522-1300513-522-1300

Tina Fisher – Tina Fisher – Principal Financial GroupPrincipal Financial Group – – 330-836-6220330-836-6220

Jeff Gelburd – Jeff Gelburd – Marsh USA, Inc.Marsh USA, Inc. – 717-234-3333 – 717-234-3333

#1 – A person NOT named as a #1 – A person NOT named as a fiduciary is NOT a fiduciary.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.

#2 – Board of Directors does #2 – Board of Directors does NOT have fiduciary NOT have fiduciary

responsibility for the ESOPresponsibility for the ESOP

• Board of Directors generally selects & appoints ESOP fiduciaries – that is a fiduciary decision by the Board

#3 – Management hires the #3 – Management hires the ESOP TrusteeESOP 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

#4 – An ESOP fiduciary must #4 – An ESOP fiduciary must act solely for the benefit of the act solely for the benefit of the

company’s employeescompany’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

#5 – Management hires the #5 – Management hires the ESOP independent valuation ESOP independent valuation

advisoradvisor

• No – The ESOP independent valuation advisor is hired by the ESOP Trustee

#6 –#6 – The independent valuation The independent valuation advisor sets the price for ESOP advisor sets the price for ESOP

shares of company stockshares 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

#7 – TPA (Third Party #7 – TPA (Third Party Administrator) has fiduciary Administrator) has fiduciary responsibility to the ESOPresponsibility 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

#8 – The ESOP Administrative #8 – The ESOP Administrative Committee has fiduciary Committee has fiduciary

responsibility only if the Trustee is responsibility only if the Trustee is a directed Trusteea 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

#9 – A “Not For Sale” Resolution #9 – A “Not For Sale” Resolution by the Board of Directors means by the Board of Directors means the Company can ignore offers to the Company can ignore offers to

purchase the Companypurchase the Company

• Regarding the ESOP, the Resolution is worthless

• If followed, it may be a breach of fiduciary responsibility

#10 – An ESOP Trustee MUST #10 – An ESOP Trustee MUST accept any offer to purchase ESOP accept any offer to purchase ESOP shares for greater than the current shares for greater than the current

appraised ESOP stock priceappraised 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

#11 – Pass-through voting by #11 – Pass-through voting by ESOP Participants is required ESOP Participants is required on any merger or acquisitionon any merger or acquisition

• Merger – YES

• Acquisition – NO– Unless the acquisition involves a merger

#12 - Pass-through voting by #12 - Pass-through voting by ESOP Participants is required ESOP Participants is required

on a sale of ESOP stockon a sale of ESOP stock

• Sale of ESOP shares – NO, unless a merger is involved

• Sale of substantially all of the Company assets - YES

#13 – A person with a conflict of #13 – A person with a conflict of interest in a transaction CANNOT interest in a transaction CANNOT serve as ESOP Trustee for that serve as ESOP Trustee for that

transactiontransaction

• No – it is NOT illegal

• May not be smart

• May invite lawsuits

• BUT it is NOT illegal

#14 – Trustees fulfill their fiduciary #14 – Trustees fulfill their fiduciary responsibility re ESOP stock price by responsibility re ESOP stock price by

hiring a qualified independent hiring a qualified independent valuation advisorvaluation 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

#15 – Only MBAs/CPAs can be #15 – Only MBAs/CPAs can be ESOP Trustees;ESOP Trustees;

NonManagement employees do NOT NonManagement employees do NOT qualify to be Trusteesqualify 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

#16 – “Business judgment” #16 – “Business judgment” doctrine protects fiduciaries; doctrine protects fiduciaries; therefore, they should NOT therefore, they should NOT

document their processdocument their process

• PROCESS is the key

• Follow process of due diligence

• Ask questions

• Document everything

#17 – Fiduciary liability is a #17 – Fiduciary liability is a company liability, NOT a company liability, NOT a

personal liabilitypersonal 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

#18 – The Company’s #18 – The Company’s indemnification clause protects indemnification clause protects fiduciaries from personal liabilityfiduciaries 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

#19 – Either the Fidelity Bond, D&O #19 – Either the Fidelity Bond, D&O Insurance, or Fiduciary Insurance will Insurance, or Fiduciary Insurance will

protect fiduciaries from personal liabilityprotect 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

#20 – Fiduciaries can fulfill#20 – Fiduciaries can fulfilltheir fiduciary responsibilitytheir fiduciary responsibility

by following the termsby following the termsof the ESOP Plan Documentof 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