ESOPs

Chapter 10

Litigation and Significant Cases

This chapter provides an overview of how litigation and federal court cases have had a material impact on the development of the regulatory environment for employee stock ownership plans (ESOPs). When ESOPs were first authorized, there was, at best, a vague understanding of the practical applications of the plans. With time, the administration of ESOPs has come into much sharper focus, as well as a refined understanding of fiduciary obligations.

The Employee Retirement Income Security Act of 1974 and ESOPs

The Employee Retirement Income Security Act of 1974 (ERISA) was landmark legislation signed into law with the intent of achieving a number of important national goals. One of the most important of those goals was to provide a foundation for a comprehensive system of retirement plans that were intended to compliment Social Security. The ERISA legislation addressed a number of retirement programs, including pension plans, profit sharing plans, 401(k) savings plans, and ESOPs.

ESOPs were created by the legislation both to provide a long-term retirement benefit and to encourage employee ownership. This special dual role of ESOPs marks them as unique among qualified retirement plans. In the case of ESOPs in closely held companies in which the securities are not actively traded, the stock of the plan sponsor must be valued by an independent professional. This valuation mandate is ongoing as long as the plan sponsor (the company) continues ...