What We Do

WHAT WE DO

In an ESOP transaction, some or all of the owners of a company decide to sell some or all of their stock to the company’s employees through an employee stock ownership plan (ESOP). The ESOP is a qualified retirement plan that allows employees to acquire ownership in their employer company through a trust. The trust is created and funded by the company, which then uses the funds to purchase company stock, and the shares are then allocated to individual employee accounts based on a formula set out in the plan.


As a result of the transaction, the company becomes owned, in part or in whole, by the ESOP trust and its participants (the employees). The employees’ ownership in the company increases over time as they accrue additional shares through the ESOP, and the company’s financial performance affects the value of the shares. The transaction can provide liquidity to the company’s owners who sell their shares, and it can also provide tax benefits to the company and the selling shareholders. Additionally, the ESOP can be a powerful tool for motivating and retaining employees, as they have a vested interest in the company’s success.


It’s important to note that an ESOP transaction is a complex process with many legal, financial, and tax implications, and it should be carefully planned and executed with the help of experienced professionals. That is where Fiduciary Services comes in.

Transactional Trustee

The primary purpose of an ESOP (Employee Stock Ownership Plan) is to – wait for it – own the stock of the sponsoring employer.

 

But how does the stock actually end up in the trust? Do the previous owners/founders just give it away? Of course not.

 

Getting the shares into the ESOP trust presents a bit of a dilemma: the selling shareholders want the highest price they can get for their shares, while the ESOP Trust wants to pay the lowest price they can to acquire the same shares.

 

How do we break this logjam? And who structures the deal and does all the negotiating?

The selling shareholders will likely be represented by their corporate or financial advisors, and the Trust will be represented by the Trustee. This is us.

 

Our job is to negotiate on behalf of the Trust and pay no more than fair market value for the company shares, both in price and other deal terms.

 

We handle the due diligence, negotiations, pre-closing, closing, and post-closing activities on behalf of the trust. We are an independent, 3rd -party, not-emotionally-attached party to the transaction. Our job is to remain calm, cool, and collected on behalf of the Trust during what may be the biggest transaction of the selling shareholder’s life.

 

Likewise, what happens later on down-the-road when an ESOP-owned company receives an offer from another company to buy out the ESOP shares and cash out all the Trust participants? What should the Trust do? Do we take their proposed offer? Is it fair? What happens to the Trust participants? Who handles the due diligence, negotiations, pre-closing, closing, and post-closing activities on behalf of the Trust?

 

Again, this is us.

 

We’ve been down this road many, many times. Both on the buy side and the sell side. Our job is a smooth, equitable ESOP transaction in the best interest of the Trust participants.

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Ongoing Trustee

Once the sponsoring-employer’s stock shares are in the ESOP Trust, then what? Who handles:

  • Custody
  • Valuation
  • Trust administration / reconciliation
  • Governance
  • Long-term Trust sustainability (including repurchase obligations)
 

The ESOP Trustee does.

 

Who serves as the Trustee then? Whomever the Board of Directors appoints.

Who should the Board appoint? Someone internally? Or someone external to the company? There are pros/cons either way. An internal Trustee will be more familiar with the nuances of the company, but less familiar with ESOP regulation and administration. An external Trustee, though not as familiar with the inner workings of the company, specializes in ESOP administration and may be better suited to handle the ESOP Trust.

 

The ESOP Plan Administrator (usually the Board, or an appointee thereof), still has a heavy hand in the ESOP, but using an external Trustee may mitigate some of the Board’s liability and risk exposure compared to an internal Trustee who may not have as much ESOP-related experience.

 

Many years ago, most ESOPs – about 70% – had internal Trustees. Nowadays, that ratio is flipped: about 70% have external, professional Trustees. The risk is high and the consequences are heavy for non-compliance.

 

If a company were to add up the costs of education, experience, training, research, and lost productivity of having someone internal serve as Trustee (let alone the risk exposure and liability), the company may more than offset any professional fees paid to an independent, external Trustee.

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Special Fiduciary

What happens when an internal Trustee finds themselves in a conflicted position? For example:

  • Financial Interest: An internal trustee is also a shareholder or has a significant financial interest in a company that the organization is considering entering into a business relationship with. This conflict of interest arises because the trustee’s personal financial gain may influence their decision-making process regarding the business relationship, potentially compromising their duty to act in the best interests of the organization.
  • Personal Relationship: An internal trustee has a personal relationship, such as a close friendship or familial tie, with an individual or organization involved in a decision or transaction that the organization is undertaking. This personal relationship may create a conflict of interest as the trustee’s loyalty or bias toward the person or entity could impact their ability to make impartial decisions in the best interests of the organization.
  • Professional Opportunity: An internal trustee is presented with a professional opportunity outside of their role within the organization that could potentially conflict with their duties as a trustee. For example, a trustee may be offered a job or consulting opportunity with a competing organization, which could create a conflict of interest if their actions as a trustee could potentially benefit the competing organization to the detriment of their current organization.
 

What is the prudent action for the internal Trustee to do in these cases? Recuse themselves and bring in an external Trustee to work on this one specific issue.

 

Once the issue is resolved, the external Trustee can step back and the internal Trustee can resume normal duties.

 

Facing a similar situation? Let’s talk.

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WHY CHOOSE EXTERNAL ESOP TRUSTEE SERVICES?

WE ARE EXPERTS.

Fiduciary Services is a team of experts with over 90 years of ERISA experience, making them well-suited to fulfill the fiduciary obligations of a trustee for ESOPs. Since Fiduciary Services focuses solely on providing trustee services, they can devote the necessary time and resources to perform these services properly, and clients benefit from the expertise of the many professionals on the team.

WE ASSUME RESPONSIBILITY.

Fiduciary Services takes responsibility for overseeing ESOP transactions and administration, as the Department of Labor requires strict compliance with ERISA rules. Under ERISA, the trustee is individually liable for breaches of fiduciary duty relating to the ESOP or its assets. An external trustee such as Fiduciary Services is better equipped to comply with ERISA and defend its fiduciary decisions against potential legal action by the Department of Labor or class actions by participants.

WE ARE OBJECTIVE.

As an external, independent fiduciary, Fiduciary Services ensures that there are no conflicts of interest between the duties of the trustee to the employer and the duties to the participants. With an objective expert steeped in ERISA knowledge negotiating the transaction on behalf of plan participants and managing plan assets, the trustees can fulfill their core ERISA concept of acting exclusively for the benefit of ESOP participants.

WE PROVIDE FIDUCIARY INSURANCE.

Moreover, Fiduciary Services maintains fiduciary insurance to cover any claims by third parties that might arise, unlike most internal trustees. The insurance the trustee maintains can also be used to defray the company’s indemnification liability since a trustee is typically indemnified by the company sponsor for all claims against the trustee involving the company’s ESOP.

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