The ESOP Committee Guide

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Embeds 0 No embeds. No notes for slide. No reader should act on the basis of any statement contained herein without seeking adequate professional advice. The authors and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance merely upon the contents of this paper. The intention of this Whitepaper is to educate and is not meant to be exhaustive or prescriptive either.

Their sole intention is to outline the facts and guide decision-making. Discretion is advised.

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Further this document has been designed to collate all the relevant information about the subject matter and allow you to further read based on your interests. We thank all the contributors whose information and links we have shared in each page. This document intends to be the front face on the topic more than a research paper. Mar 3. To win in the marketplace you must first win in the workplace.


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In order to use the method, you need to be registered as a corporation with shares or similar stock units. Defines the coverage of employee levels of the plan, e.

ESOPs - Grant, Vesting and Exercise dates simplified

Allows employees to become share holders today but applies restrictions on the transferability or ownership to safeguard company interests. Mimics equity interest but without altering or modifying the cap table to incentivise employees for current and future performance. I want my employees to be owners like me.

Investors would want me to have ESOPs to retain talent. I want my employees to have a share of our success subject to Flexibility to operate and option to buy-back is paramount. I need to reserve certain rights as my investor wants them. I want them to partake in liquidity events.

I believe their contributions are specific to certain areas mostly. Stock dilution may impact me negatively in this scenario. This ensures that future stakeholders are also in the know and aligned to the long-term objective. To encourage, motivate and retain employees contributing to the overall management by enabling ownership while allowing them to accrue personal wealth and gain from the growth of the company.

Structure is based on the goal of the plan, e. This is important to decide on the type of plan, e. This allows to decide on the quantum, tenure and conditions for exercise, e. This defines the performance goals that the plan may be attached to, e. Clear, concise and friendly in demeanour.


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  • This enables all employees to be clear and refer to it for any clarifications. We have culled over 20 principles of corporate governance from published comparisons of public company best practices. This article focuses on those principles of corporate governance that are most relevant for closely held ESOP corporations.

    Limited commentary on best practices is also included. The U. Three major characteristics of the U. The shareholders annually elect the board of directors to run the corporation. Even if not specified in the articles or bylaws, modern state corporations codes specify certain corporate transactions that require shareholder approval.

    These include mergers, reorganizations and liquidation of the corporation. Some ESOP participants are surprised to learn that, under most state corporations statutes, certain corporate transactions, such as issuing new shares to investors, do not always require shareholder approval. As the shareholder of record, the ESOP trustee votes the shares of the company as any other shareholder would. An ESOP can be written to require pass-through of voting rights to participants on all issues voted on by the trustee.

    This design in part replicates the proxy and voting procedures of public companies whereby the slate of director candidates and other issues the board asks approval for are presented to the company shareholders. State corporate law recognizes that a board does not generally exercise its power and authority directly. State law permits the board, and individual directors, to rely on information, opinions, reports, or statements, including financial statements and other financial data, that are prepared or presented by those committees, officers or senior management, and professionals or other experts.

    Some state corporations statutes, the California Corporations Code, for example, provide little specific guidance on the role of officers. Instead, it is implied by the statute that officers carry out the direction of the board and manage the business and affairs of the enterprise subject to oversight of the board.

    Directors exercise their authority only as a board and not as individuals. Authority is exercised only by action of a majority of the directors present at a meeting at which a quorum is present, unless the act of a greater number is required by the articles or bylaws. A majority of all of the authorized number of directors is necessary to constitute a quorum for a meeting.

    If the directors are sued because of that decision, a court applying the business judgment rule will not second-guess the merits of the decision as long as the court finds all of the following to be true:.

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    In such cases, the board must approve the action by a majority, without the interested director voting for approval. If the transaction is approved on this basis, then the action will have the presumption of correctness under the business judgment rule. If not, then the interested director will bear the burden of proof that the transaction was sound if it is ever challenged. None of these principles of state corporate law are changed by the fact that a corporation may have an ESOP as a shareholder. The board of directors will still govern the corporation.

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    The board will continue to delegate operational authority to appointed officers. The ESOP simply votes as any other shareholder. It is possible for an action or inaction of the board of directors to constitute a fiduciary breach where an ESOP trustee also is a member of the board of directors. The ESOP fiduciary could have a duty to sue as a shareholder directly or in a derivative capacity, as applicable to recover damages caused by the board on which he sits on behalf of the ESOP trust that he trustees. However, the action by the board of directors of the corporation would have to fail under the business judgment rule, and constitute a breach of corporate duty.

    The investment firm TIAA-CREF, in its policy statement on Corporate Governance Policy Statement , states that the primary responsibility of the board of directors is to foster the long-term success of the corporation consistent with its responsibility to its shareholders. This is a fair and succinct statement of what a board of directors must do for the corporation.

    Companies often have officers with less management experience than certain board members. Mentoring is, therefore, a common dynamic. The California Corporations Code requires a minimum number of directors based upon the number of the shareholders of the corporation. In closely held companies, it is not unusual for the board of directors to be entirely comprised of officers of the corporation. This is not ideal, however, where there are shareholders who are neither directors nor officers.

    Even so, it is common for a board of directors to include individuals who are also trustees of the ESOP and who may also be officers and employees of the company. This can be a difficult task for private corporations. It is, however, the most significant corporate governance hurdle for a private ESOP company to cross. Most Fortune 1, companies include in their corporate governance documents a requirement that a majority of the board members be independent outside directors. This may not be possible for many ESOP companies, but it is a laudable goal.

    In fulfilling its obligations, the core responsibilities of the board of directors are as follows:. Two issues dominate the selection of board members. First, who should be responsible for selecting candidates and recommending them to the shareholders for election? Second, where can the company find suitable, qualified candidates to serve on the board? In a closely-held corporation, both of these issues are significant. On the first issue, most bylaws of closely-held corporations fail to clearly state a nominating structure for selecting a slate of candidates for election to the board.

    The Policy Statement also states that it ordinarily does not support shareholder resolutions requiring that candidates for the board be nominated by shareholders. Furthermore, each director should represent all shareholders. This is an interesting point to focus on in the context of a closely-held ESOP corporation.

    This appears contrary to best practices of corporate governance. Directors must represent all shareholders. The notion of representative employees being elected to the board by vote of the ESOP shares is even more troublesome. Unless individual employees of the company can demonstrate a level of business sophistication and experience that warrants their service as directors, which necessarily includes supervising the management of the company, they should not serve as directors.

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    Alternate means of involving employees in the management of the company should be developed. Employees can better affect the value of the company through organization of their job function, than they can by serving on the board. By extension, it is not reasonable to assume that ESOP participants will be qualified to recruit and nominate candidates for the board of directors from outside the corporation.

    It appears, therefore, that the responsibility to identify appropriate board candidates in the case of an ESOP company should still rest with the board, or to a committee of the board. If the board is large and well developed, this could be limited to certain outside directors who are already seated on the board. This conclusion leads to the resolution of the second issue. If the board or the nominating committee of the board is responsible for recruiting appropriate candidates, then it is expected that through a network of business contacts they can identify qualified candidates to serve.

    This, of course, may not be easy. It will be particularly difficult for ESOP companies who are looking to expand their board of directors for the first time.

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    For most private companies this is difficult. The most important consideration is that the board must have a substantial degree of independence from management. Changes in the federal securities laws and rules for the New York Stock Exchange resulting from corporate scandals call for a strict standard of independence by excluding persons who serve in a consulting or service capacity to the company from also serving on the board.

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