TYPICAL PROCESS AND REPORTING OF FIDUCIARY SERVICES, INC. AS INDEPENDENT FIDUCIARY TO AN EMPLOYEE STOCK OWNERSHIP PLAN
Fiduciary Services, Inc. (FSI) typically enters in to a contract with a company or trust (Company) to act as an independent fiduciary to the Company’s Employee Stock Ownership Plan and Trust (ESOP). The purpose of the engagement is clearly stated and typically in the case of an ESOP formation, is to make a determination of what action the ESOP should take relating to the proposed sale of stock of the company by an owner/officer to the Trust.
In addition, the independent fiduciary is authorized to take whatever other actions are necessary or appropriate regarding the voting of shares of the Company stock by the Trustee. Below is a summary of a typical process undertaken by FSI to review the relevant material, address the issues and relate actions taken in light of conclusions reached.
The due diligence undertaken involves reviewing the Company financials, history, and projections, a review of the report submitted by the independent valuation agent and an examination of the relevant documents prepared for the transaction. There are usually also interviews conducted with Company executives and employees that include the internal and independent Board Members. On site and phone interviews are held to gain insight into the history, current standing and potential for future growth as well as threats and prospects to the Company. Interviews are also held with the various consultants and advisers to the Company. FSI may attend certain meetings of the Board of Directors of the Company that are held once the engagement begins.
A sample of some typical relevant documents to be examined relating to the issues presented include those set out below:
- ESOP plan, trust agreement and related document
- Documents relating to the proposed ESOP loan and Company borrowing.
- Documents relating to the proposed financing.
- ESOP Repurchase Liability Projection Report.
- Proposed Stockholder Agreement.
- Stock Purchase Agreement.
- Stock Redemption Agreement
- Company prepared financials as well as financial projections.
- Company audited financial reports for years last five years latest interim report
- Prior annual independent valuation reports.
- Updated Independent valuation report.
- Employment Agreement proposed between key executives and the company.
- Stockholder Agreement proposed
Some interviews are in person and usually arranged at convenient times for interviewees during the on-site visit. Other interviews can be arranged to be held over the telephone.
Company: A typical list of interviews held with management at the Company including outside directors:
Chairman and CEO
Chief Operating Officer
Sales and Marketing manager
Bank lending officer
Counsel to the Company
Counsel to the ESOP trust
On Site Due Diligence Visits:
An onsite visit is also made to the administrative facility and sometimes other locations for review of physical operations and office administration.
Report Issued with Conclusions:
At the conclusion of the due diligence process and analysis of the facts, a determination or various determinations are made and spelled out in a report. Many issues revolve around the ESOP as a shareholder in the Company and make determinations on what would be in the best interest of the participants and beneficiaries of the ESOP trust.
Certain general observations are usually laid out addressing the Company’s past, current situation and prospects for the future in light of its market position, management and any debt that will be taken on to finance the ESOP.
FSI then states its determination as to the appropriateness of the transaction going through and its fairness and the direction of a vote of the shares to the trustee.
Before the closing of a transaction, FSI may participate in meetings with the plan participants and employees to inform them of such proposed transaction. These may be held in various offices of the Company. FSI will review the notice prepared that details the proposed introduction of an ESOP plan and its potential impact on the employees as well as certain details outlining the capital and management changes to the Company. Distribution elections are also addressed with terminated participants.
A report is also typically prepared that is directed to the Company’s Board of Directors that details the FSI determinations prior to a vote of the Board on the adoption of the proposed transaction.
FSI is typically present at the document closing of the transaction to assist on behalf of the ESOP, where needed in reviewing, approving and directing the execution by the Trustee of the ESOP.