Through a series of recent settlements, the US Department of Labor (DOL) has outlined the process steps fiduciaries should follow in connection with a transaction involving a purchase from, or sale to, an employee stock ownership plan (ESOP). Largely based on the “fiduciary process steps” first introduced by the DOL in the 2014 settlement of Perez v. GreatBanc Trust Co., this new guidance has neither the force of law nor the ability to change any current laws or regulations. The recent settlements may, however, provide helpful insight into the DOL’s position regarding what is required to meet fiduciary obligations under the Employee Retirement Income Security Act of 1974 (ERISA) when engaging in an ESOP transaction.
Approximately 90 percent of ESOPs hold stock of closely held corporations. The ESOP will purchase stock from one or more company owners at a price determined by an ESOP fiduciary. Because most ESOP fiduciaries are not valuation experts, ERISA generally requires the fiduciary to determine the stock’s fair market value by relying upon the work of an independent appraisal expert. If the fiduciary relies on an inadequate appraisal, however, the fiduciary can breach its duties and/or violate ERISA’s prohibited transaction rules.
ERISA requires that an ESOP’s fiduciaries—which generally include its trustees, the sponsoring employer, the individuals that sit on the sponsoring employer’s board of directors, and any employees involved in the administration and operation of the ESOP—establish and operate the ESOP for the exclusive purpose of providing benefits to ESOP participants and beneficiaries, while defraying reasonable expenses of administering the plan. This is a high standard that is often expressed as the idea that an ESOP fiduciary must act as a “prudent expert” would act. Given this “prudent expert” standard, ERISA permits, and may in fact require, the ESOP fiduciary to rely on an independent appraisal expert to assist the ESOP fiduciary in determining the value of closely held employer stock.
Read more at: ESOP DOL ERISA