What is Corporate Governance like in an ESOP-Owned Company?

Board of Directors:  Under state law, a corporation’s authority vests in its board of directors.  Other than a duty to appoint fiduciaries of the plan and the duty to monitor their compliance, there are no ESOP-specific legal requirements of the board of directors of an ESOP-owned corporation. The board is elected by the shareholders of a corporation and is responsible for making strategic decisions about the direction of the corporation.  The board will appoint the officers and hire the management team who will carry out that strategic direction on a day-to-day basis.  The board has a fiduciary duty to the corporation’s shareholders to protect their interests, which generally means growing shareholder value. Other responsibilities of the board include overseeing executive compensation, responding to offers, approving the financial statements, and hiring the ESOP Trustee.

ESOP Committee The board may appoint a committee to oversee the daily operations of the plan.  The committee’s responsibilities may entail fiduciary obligations if the committee has authority and discretion over the management of the plan.  However, not every ESOP committee is a fiduciary under ERISA.  The ESOP committee is created in the plan documents, but there is no legal requirement that a corporation have an ESOP committee.

ESOP Trustee:  The ESOP Trustee is responsible for managing the assets of the ESOP for “the exclusive benefit of” the ESOP Participants and in accordance with the plan documents and ERISA.  In order to satisfy this requirement, the ESOP Trustee will have a valuation firm that will complete the ESOP annual appraisal and a third-party administration firm to perform all of the IRS testing and issue account statements to the ESOP Participants.

The ESOP Trust – not the ESOP Participants – is the legal owner of the shares that the ESOP purchases.  Thus, in a 100% ESOP-owned corporation, the corporation has only one shareholder, the ESOP Trust.  The ESOP Trustee has rights like any other shareholder under corporate law, such as electing the corporation’s board of directors.  The ESOP Trustee typically will not serve on the board of directors, but will likely require that the board include one or two independent directors.  The outgoing board will usually present the ESOP Trustee with a slate of candidates and the ESOP Trustee will cast a vote to either approve or not approve that slate.

The ESOP Trustee is also responsible for voting all of the shares owned by the ESOP, regardless of whether those shares are allocated to ESOP Participants’ accounts.  The plan document will indicate how the ESOP Trustee determines how to vote.  In a closely held corporation, the ESOP Participants will direct the ESOP Trustee on how to vote allocated shares only on a limited number of major corporate issues, including a sale of all or substantially all of the corporation’s assets; merger; liquidation; recapitalization; reclassification; dissolution; and consolidation.  Pass-through voting by the ESOP Participants is not required for how to vote on other issues, such as voting for the board, agreeing to tender the stock, and selling the stock.


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