DEBORAH GROBAN OLSON
ATTORNEY AT LAW
1021 Nottingham Road
Grosse Pointe Park, Michigan 48230
Telephone (313) 331 7821
Fax (313) 331 2567
Email dgo@esoplaw.com
(313) 964-2460 or (313) 331-7821
February 1996You may wish to consider amending your ESOP. Changing your plan language could allow your trustees, in many cases, to mirror vote unallocated or uninstructed shares which they are now required by you plan not to vote or to vote without regard to the instructions of the allocated stock.
On August 28, 1995 the Internal Revenue Service "IRS" published Revenue Ruling 95-57 permitting ESOP trustees to vote the shares of employer stock allocated to participants, but for which no voting instructions have been given by the participants ("uninstructed" shares), reversing its previous position. The US Department of Labor ("DOL") had for many years taken a position in conflict with the IRS, that Trustees must vote unallocated and by implication also uninstructed shares and must exercise their own judgment to do so, whether they follow the voting patterns of participants who gave instructions on allocated stock, called "mirror voting", or used their own discretion.
Please understand in reading this analysis of the Nationsbank case, that this is the opinion of one federal district court, prior to the recent letter of Olena Berg. Although individuals are entitled to bring suit under ERISA, most of the law in this area is made based upon suits brought by the Secretary of Labor. Therefore, a DOL opinion letter in this area carries quite a bit of practical weight.On September 28, 1995 Assistant Secretary of Labor, Olena Berg, issued an opinion, in response to a request from the AFL-CIO, stating that in an ESOP plan which provides for mirror voting by the trustees on unallocated and uninstructed stock, the trustees must follow the plan provisions which require unallocated and uninstructed allocated shares to be voted in accordance with the participant instructions unless the trustee can articulate well founded reasons why doing so would violate ERISA. The burden is on the trustee to show that following the plan would violate the law.
The practical meaning of the DOL position on mirror voting is a bit less clear than it may seem from Olena Berg's letter due to the outstanding lawsuit in which the DOL is challenging very similar pass through provisions at a non-union company, Polaroid. In Reich v. Nationsbank, US DC ND Georgia, 1995 U.S. Dist. LEXIS 5328, (3/29/95) the Court decided that: When a Trustee receives no direction from a participant, the Trustee must exercise its independent judgment; and the Trustee must exercise its independent judgment when voting unallocated shares, because to follow the directions of the other participants would be to have one participant act as the fiduciary for future participants with whom he may have a conflict of interest, rather than having the trustee do so. The Court also made an interesting comment (although did not decide the matter in this case) that Congress may have intended to permit complete mirror voting of all unallocated and uninstructed shares in cases where the ESOP provides that all stock is voted on a one vote per person basis pursuant to IRS Sec. 409(e)(5).
Michael Keeling, Executive Director of the ESOP Association wrote to the DOL objecting that the DOL's position in Nationsbank and in Olena Berg's letter to the AFL-CIO were contradictory and that the DOL should drop its case against the Polaroid trustees.
The DOL responded to Keeling that its positions in both cases were consistent. In the Berg letter it put the burden on the Trustee to follow the plan language, including mirror provisions, unless it found that to do so would violate ERISA's prudence requirement or the best interests of the participants. It stated that in the Nationsbank case, the facts were clear that the self-tender offer of $50 per share were so much better than the $45 offered by Shamrock or the option of not tendering the shares, that the Trustees could not prudently take any action, nor follow any instructions to do other than to sell the shares to Polaroid at $50.
This DOL answer raises another question that the Court mentioned in Nationsbank. How can a Trustee follow instructions for allocated stock which it does not find prudent for uninstructed or unallocated stock? Without finding logic in this position, the Court accepts that the law permits the trustee to follow such instructions for allocated directed stock, because the participants are acting as "named fiduciaries" for themselves in that case.
This firm agrees with the DOL response to Keeling that its positions are not inconsistent for two reasons. First, it is our analysis that the DOL letter and Nationsbank demonstrate both sides of the same position, that at all times a trustee is subject to the ERISA prudence requirements. The DOL letter addresses what the trustee must do if the trustee does not follow participant instructions pursuant to a mirror voting provision, while Nationsbank addresses what the trustee must do if the trustee does follow participant instructions pursuant to a mirror voting provision. Both the Olena Berg letter and Nationsbank say that the trustee must comply with the prudence standard of ERISA. Second, as a practical matter, ERISA violation suits are brought primarily by the DOL; so, if you want to avoid being sued for a violation of ERISA and the DOL says that their positions are consistent, it is wise to take their word for it and act accordingly.
In Moench v. Robertson , 62 F. 3d 553 (3rd Cir. 1995), the appeals court held that the ESOP trustee violated ERISA's fiduciary standards when it invested in company stock that was declining in value due to the company's poor financial condition. However, it created some greater protection for ESOP trustees when they purchase company stock by articulating a new standard, putting the burden of proof of fiduciary breach on the plaintiff and determining that an ESOP trustee is entitled to the presumption that it acted in accordance with ERISA's fiduciary standards by investing in company stock. The presumption can be rebutted if it is established that the fiduciary failed to act prudently by making investments in company stock when it knew, or should have known, that the company was in poor financial condition. In Moench, the court held that where the trustee continued to invest in company stock when it declined in value from $18.25 to $.25 in two years and the trustee did not show that the investment options were impartially investigated through the documentation of deliberations and discussions and the input of outside advisors, the trustee violated ERISA. Thus, even with this presumption favoring them, ESOP trustees must use appropriate diligence in considering its investment options and documenting such considerations.
The standard of proof in Moench was further refined by Kuper v. Iovenko, 66 F.3d 1447,1460 (6th Cir. 1995) (citing Fink v. National Savings & Trust Co., 772 F 2d 951, 962 (D.C. Cir. 1985)), holding that to prove a fiduciary breached ERISA's fiduciary standards, it is not enough for the Plaintiff to prove that the fiduciary failed to investigate an investment decision. The Plaintiff must establish a causal link between the failure to investigate and the harm to the plan. The court held that "in order to establish this causal link, a Plaintiff must demonstrate that an adequate investigation would have revealed to a reasonable fiduciary that the investment in issue was improvident."
The Employee Stock Ownership Plan (ESOP) at National Forge is a contract ESOP with a formula vote and not a traditional leveraged ESOP. The National Forge ESOP will acquire its 63.5% interest in the company over a period of 5-7 years but the ESOP participants stock has a special formula vote giving participants 63.5% of the voting rights prior to their acquisition of that stock which is why it's called a "gorilla " vote.
National Forge Company, located in Irvine, Pennsylvania, is a leading manufacturer of very large precision machined forging. More specifically, National Forge is an international market leader in the crankshaft, pipe mold, and defense markets. It was founded in 1915 by Clinton Wilder, and continued under the Wilder family ownership until June of 1995. In May of 1994, the Wilder family provided the National Forge employees with an opportunity to make a bid for the Company.
In June of 1995, 676 employees of National Forge Company purchased the 80 year old family-owned business utilizing an ESOP. Approximately 550 of them are represented by the Independent Union of National Forge Employees ("IUNFE" or "Union"). An employee buyout committee comprised of senior management, salaried employees, and representatives of the Union led the transaction. Atty. Deborah Groban Olson represented the Union in negotiations with the Wilder family, the lenders, and management.
A consortium of lenders led by Chemical Bank provided financing. Senior management provided initial cash equity via private placement. The seller also maintains a small continuing interest in the business.
The National Forge employees agreed to a 10% wage and benefit reduction in order to facilitate the buyout. These reductions will be offset with a substantial new profit-sharing plan, as well as the ESOP shares. The company's board of directors will include hourly employees and Union representatives, as well as senior management and outside directors, chosen jointly by labor and management.
The successful purchase of National Forge Company by its own employees has allowed the Wilder family to retire from management of the company while still retaining a small interest, has kept the jobs and wealth generated by National Forge in the Irvine community, and has given the National Forge employees a voice and financial interest in the continued growth and prosperity of National Forge. It has also created a new voice for all employees and the Union in making corporate decisions.
Carris Reels is a family owned company with 710 employees in 15 plants in eight states and sales estimated at $83 million in 1995. Owner Bill Carris is a strong believer in participation and community building. On December 31, 1995 the company transferred 10% of its stock to its employees using an ESOP as part of a plan to transfer 100% ownership to the employees over a period of approximately 10 years. Bill Carris created a long term plan to move his company not only from family to employee ownership, but to transform its culture and employees to community stewards as well as profit making owners. Some of the first concrete steps in this process were the creation of the ESOP plan, and the employee participation committee, and involvement of the employees in designing that plan.
Assisted by Attorney Deborah Olson, Carris Reels used a several stage education and decision making process with a four-fold purpose:
The outcome was that:
% Groban Olson Law Firm
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645 Griswold St.
Detroit, MI 48226