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The Employee Ownership Update

Loren Rodgers

January 17, 2017

(Loren Rodgers)

Supreme Court Likely to Hear ESOP Indemnification Case

On January 9, the Supreme Court invited the solicitor general to file a brief in a case regarding ESOPs, indicating the Court's interest in hearing the case. The case concerns whether ERISA permits courts to order one fiduciary to indemnify another. In the case, Fenkell v. Alliance Holdings, Inc., the district court ruled that the ESOP trustees needed to restore losses suffered by the plan while at the same time ruling that one trustee, Fenkell, indemnify the other trustees. The district court found that Fenkell was the "more culpable fiduciary," and the Seventh Circuit Court affirmed this decision. The circuit courts are divided on similar questions. Although the Second Circuit Court takes a similar position, the Eighth and Ninth circuits have disagreed.

Secretary of Labor Nominee's Book Mentions Employee Ownership

Andrew Puzder, who is nominated to be Secretary of Labor in the Trump Administration, "has left employee benefits practitioners scratching their heads about what to expect from the DOL's Employee Benefits Security Administration" in the words of Sean Forbes, a reporter for Bloomberg BNA. One clue to his position on equity compensation and employee ownership comes from a passage in his book, in which he writes that workers "may also have some means to obtain equity in their own company through some form of stock purchase plan, options and/or shares granted as a bonus, or as part of a retirement plan."

Case Alleging Self-Dealing by Trustee Permitted to Proceed

Judge James C. Cacheris of the Eastern District of Virginia refused to dismiss a case on January 10, in a case alleging that the trustee of an ESOP exercised his governance power to protect his own employment rather than in the interest of plan participants. The plaintiff, a member of the company's board of directors, argued that the defendant, the company's CEO and its ESOP's trustee, had been notified by the board that it was planning to terminate his employment, and that he used his role as ESOP trustee to appoint new directors, thereby protecting his job. The CEO argued that the exercise of a trustee's authority cannot constitute a violation of ERISA, but the judge ruled that if the allegations were true, they would demonstrate a failure to act in the interest of plan participants.

Practical Tip: The Board, the Trustee, and Valuation

ESOP company boards have a fiduciary obligation to monitor the ESOP trustee to make sure that the trustee is properly assessing the valuation process. That raises a number of questions. Should the board read the valuation report? Some outside trustees say no, because the board should not be involved in the process. But if the board does not read the report, how is it to assess the trustee? Is it sufficient to just assess the process reported by the trustee? In our view, reading the report provides critical information for boards on this issue as well as how the company is performing.

But what if on doing that the board believes there are problems? The board should not directly approach, much less replace, the appraiser. That is the trustee's duty. But the board can ask to meet with the trustee to raise the issue and ask how the trustee has approached it. The answers may resolve the concern, or perhaps raise an issue the trustee has not considered, such as there not being an assessment of the repurchase obligation in the valuation. The trustee would then decide what steps to take next. The board should replace the trustee only over this issue in extreme cases in which it is convinced the trustee is acting well outside standard ESOP practices.

NCEO Board Elections Close on January 26

Over 200 people have voted so far in the elections for the NCEO's board of directors. Elections will close on January 26, and the names of the incoming directors will be announced in mid-February.

Author biography and other columns in this series

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