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A recent court decisions and the Settlement Agreement in a Department of Labor (DOL) enforcement action against an institutional ESOP trustee provide new guidelines for trustees and other ESOP fiduciaries involved in the purchase or sale of company stock.

Bear in mind that all employee stock ownership plans (ESOPs) are set up to invest primarily in the stock of the sponsoring corporation. This requirement overrides the customary duty of plan trustees to diversify plan investments, but does it also affect the duty of ESOP trustees to exercise prudence in the purchase or sale of company stock?

Supreme Court Ruling

The United States Supreme Court recently considered this issue in Fifth Third Bancorp v. Dudenhoffer. ESOP fiduciaries had previously been protected by a judicial presumption that their transactions in company stock were prudent absent evidence of extreme circumstances to the contrary, such as the company’s imminent financial collapse. The Supreme Court in Dudenhoffer determined that, contrary to prior court holdings, ESOP fiduciaries are not generally subject to a presumption of reasonableness in their dealings with company stock.

The case was remanded to the trial court in order to allow the plaintiffs, plan participants who were adversely affected by a dramatic loss in value of their company stock accounts in the Fifth Third Bancorp ESOP and 401(k) plan, to amend their complaint. Because the plaintiffs’ lawyers failed to identify specific steps plan fiduciaries should have taken in oral argument before the Supreme Court, preparing an amended complaint that passes muster under the new ruling could still pose a problem for the plaintiffs (see HERE for a discussion of the plaintiffs’ dilemma in their presentation before the Supreme Court).

Department of Labor Settlement Agreement

The recent Settlement Agreement with the DOL in Perez v. GreatBanc Trust Co. et al. also provides guidance to ESOP trustees on the purchase of company stock from controlling shareholders and other insiders. The Settlement Agreement requires a $5.25 million payment from GreatBanc and its insurers for allegedly allowing the company’s ESOP to purchase stock from the company’s co-founder and top executives for a price in excess of the stock’s fair market value.

Although the price paid for company stock by the ESOP was justified by a valuation report from an outside valuation firm, the DOL attacked the validity of the valuation report as based on overly optimistic projections of the company’s future profitability and unjustified assumptions.

The Settlement Agreement also requires GreatBanc to follow certain procedures (“Process Requirements”) when it is involved in the purchase or sale of the stock of private companies. The Process Requirements include standards for determining the independence of the ESOP’s valuation firm, a requirement of a written opinion of the ESOP trustee as to the reasonableness of any financial projection relied on in the ESOP valuation report, and documentation of the ESOP trustee’s independent analysis of the valuation report.

Although these requirements apply only to GreatBanc and do not impose any formal legal requirements on other ESOP trustees, it is clear that, while the DOL wants to promote employee stock ownership, it does not want to allow ESOPs to be used, in the words of a DOL spokesperson, as “a way to create big cash-outs for owners and top executives.”


ESOP fiduciaries need to proceed with due care in the sale or purchase of company stock. If the company’s stock is publicly traded, investment decisions involving company stock should be placed in the hands of independent fiduciaries, not company insiders. This same approach makes sense for fiduciaries of 401(k) plans that offer company stock as an investment option.

For ESOP trustees responsible for the purchase and sale of the stock of privately owned companies, the GreatBanc Settlement Agreement and a number of other DOL enforcement actions make it clear that ESOP trustees cannot accept appraisal reports as the definitive determination of the stock’s fair market value until they independently review the valuation report and verify that its projections and assumptions are reasonable.

ESOP fiduciaries may want to engage an independent valuation firm to assist with this process. And, once again, these recent ESOP fiduciary cases underscore the need for fiduciaries not only to carefully consider valuation reports but also to document their deliberations.

Fiduciary decisions do not have to be perfect but they do have to reflect suitable deliberation by plan fiduciaries – and those deliberations should be documented.