Concurrent Session 1 Pt 2

Page 1

CE Requirements - Onsite

1. Scan the session QR code upon entering the breakout room, using the Annual Conference Event app

2. Participate in the instructor-led question / discussion

3. Complete the CE survey via the session page in the mobile app

2023 Annual Conference – Kansas City, MO

Disarming Mines: Risks Facing ESOP Trustees

2023 Annual Conference – Kansas City, MO
Olivia Kowalski Vice President Chartwell Christian Nemeth Partner McDermott Will & Emory Mitchell Miller Vice President GreatBanc Trust Company

Framing the Issue

“The Congress is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans.”

Tax Reform Act of 1976, § 803(h), 90 Stat. 1590, quoted in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 416 (2014)

Litigation and the DOL’s lack of regulation has increased over time, which block the establishment and successful operation of ESOPs.

2023 Annual Conference – Kansas City, MO

The Many Roles of an ESOP Trustee

Litigation Moving Forward

2023 Annual Conference – Kansas City, MO
Agenda

Learning Objectives

Identify main sources of risk for ESOP trustees and related consequences of those risks

Understand measures trustees take to mitigate ERISA decision-making risk

Consider and evaluate potential solutions for reducing liability

2023 Annual Conference – Kansas City, MO

1. Background and congressional intent for ESOPs

2. Litigation is an increasing challenge to establishment and successful operation of ESOPs

3. Trustees are the lightning rod for litigation

4. What are solutions to reduce risk for ESOP fiduciaries?

2023 Annual Conference – Kansas City, MO
Introduction

The Many Roles of an ESOP Trustee

Close relationship with plan sponsor Scrutinize transactions Act as a prudent shareholder

2023 Annual Conference – Kansas City, MO

Annual ESOP Valuation

• Typically, the most important trustee activity (other than transaction)

• Trustee selects valuation firm (DOL Settlement Agreement)

• Appraiser must report solely to Trustee

• Trustee reviews draft and final valuation reports

• Sharing (or not) valuation report

• Confirming adequacy, accuracy & reasonableness of company financial data provided to valuation firm

• Communication with Board & participants

• Potential conflict issues for an internal trustee

2023 Annual Conference – Kansas City, MO

Repurchase Obligation

• Trustee should monitor

• Potential impact on valuation

• Future outlook

• Also, the Board’s responsibility to monitor and assess in context of overall capital allocation planning

• The Company’s RO strategy can impact valuation (redeem vs. recycle)

2023 Annual Conference – Kansas City, MO

Scrutinizing Transactions

Adequate consideration

Fairness opinion and adequate consideration

Sale of ESOP assets

Control valuation

Warrants

Redemption transactions

2023 Annual Conference – Kansas City, MO

Adequate Consideration & FMV Definition

The term “adequate consideration” means the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary of Labor.

“Fair Market Value” means the price at which an asset would change hands between a willing buyer and a willing seller the when former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well informed about the asset and the market for such asset.

2023 Annual Conference – Kansas City, MO

Fairness Opinion

An opinion from an independent financial advisor as to whether or not the consideration to be paid / received in a proposed transaction is fair, from a financial point of view, to the Company’s ESOP

Usually in the form of a brief letter and schedules, accompanied by a presentation to the Trustee

Deep level of analysis from financial advisor

2023 Annual Conference – Kansas City, MO

Sale of ESOP Assets

• Fair market value opinion test – absolute fairness

• Understand market clearing process

• Waterfall & net proceeds

• Escrows

• Employment agreements

• Synthetic equity payouts

• Buy versus hold decision

• Premium analysis

2023 Annual Conference – Kansas City, MO

Control Valuation

• Control premiums & discount for lack of control

• Valuation advisors review multiple factors in transaction context regarding Trustee’s ability to exert control

“Control is a bundle of sticks”

2023 Annual Conference – Kansas City, MO

Control Valuation

Controlling rights can include:

• Elect the board of directors and hire management

• Determine management compensation

• Declare and pay distributions

• Acquire or sell treasury shares

• Acquire or liquidate corporate assets

• Set policy and change the course of business

• Make acquisitions

• Select companies with whom to do business and award contracts

2023 Annual Conference – Kansas City, MO

Warrants

• A warrant is a financial instrument that provides the holder the right to purchase equity securities from the issuer at a specified price within a preestablished time frame

• Provides market-based returns for subordinated debt holders while allowing for flexibility in cash flows post-transaction

• Number of warrants issued and exercise price is negotiated as part of Transaction

• Must be IRC 409(p) compliant

• Exercise price no less than 90% of FMV at issuance

• Typically valued based on intrinsic value (FMV – exercise price)

2023 Annual Conference – Kansas City, MO

Redemption Transactions

A deal structure involving redemption of shares by company from shareholder followed by an ESOP transaction and/or contribution of ESOP shares

• Board may request a solvency opinion

• Trustee could request analysis of third-party advisor to support solvency and their process

2023 Annual Conference – Kansas City, MO

Process & Note Taking are Vital

• Business judgment rule

• Focus on process is key

• Reviewing analysis of legal and financial advisors

• Committee meetings and discussion

• Subjective assessments (“Why is [__] reasonable?”)

• Documenting process is important for future reference

2023 Annual Conference – Kansas City, MO

Act as a Prudent Shareholder

• Corporate veil: separation of management and investment

• Shareholder decisions are typically

• Vote to elect board directors

• Approve fundamental changes to corporation

• Mergers, sale of assets, dissolutions, changes to governing documents, etc.

• Inspect corporate documents

• Sue for wrongful acts

• ESOP trustees are diligent shareholders

• Duty of Ordinary Care vs Prudent Person Standard

• Manage trust assets in best interest of participants and beneficiaries

2023 Annual Conference – Kansas City, MO

What attracts litigation?

Litigation

Common claims in ESOP litigation

Fiduciary Duties

Breach of fiduciary duty claims

Prohibited transaction claims

Classic fact patterns

State law theories

Other defenses and issues for discussion

2023 Annual Conference – Kansas City, MO

DOL Process Agreements

• Only binding on the trustee involved in the litigation

• Provide insight into what the DOL considers best practices

• May help establish that trustee acted prudently in fulfilling its fiduciary obligations

2023 Annual Conference – Kansas City, MO

Process Agreements: Key Provisions

Fiduciary Review Process

• Take reasonable steps to determine prudence of relying on ESOP sponsor's financial statements

• Critically assess reasonableness of projections

• Document in writing its analysis of final valuation report, including:

• Marketability discounts, minority interests, and control premiums

• Analysis of the company's strengths and weaknesses

• Comparability of any companies chosen

• Propriety of methodologies chosen

• Adjustments to the company's historical financial statements

2023 Annual Conference – Kansas City, MO

Process Agreements: Key Provisions

Fiduciary Review Process (cont’d)

• Analyze valuation report, with an eye to:

• Inconsistency of conclusions with data and analyses

• Internal inconsistencies in material aspects

2023 Annual Conference – Kansas City, MO

Farmers National Bank (2020)

• DOL claimed trustee paid too much for stock

• Settlement included payment by trustee to ESOP, penalty under ERISA 502(l), loan forgiveness, and process agreement with ESOP Trustee

• FNB will not enter into any agreement providing for indemnification by an ESOP or by an ESOP-owned company (irrespective of whether the ESOP owns some or all of the company's stock) against and from any damages, expense, liabilities, and losses resulting from claims of fiduciary breach and/or prohibited transactions related to the Transaction or that otherwise would be in violation of ERISA.

2023 Annual Conference – Kansas City, MO

Farmers National Bank (Contd.)

• Must obtain additional information on valuations within past 12 months

• Allow "sufficient time" to analyze the transaction

• Document its determination, including internal process

If ESOP acquires a "controlling interest," must have certain rights

2023 Annual Conference – Kansas City, MO

Challenges Have Solutions

• Issue: increased risk over time has blocked the establishment and successful operation of ESOPs.

• One of the critical challenges is the trustee’s exposure to risk.

What solutions are available?

1) Requiring the DOL to issue clear guidance on central topics such as adequate consideration;

2) Developing the insurance marketplace for ESOP fiduciaries;

3) Reducing the threat of costly class-action lawsuits; and

4) Encouraging more professional ESOP trustees to enter the marketplace.

2023 Annual Conference – Kansas City, MO

Obtaining Clear Guidance from the DOL

• Regulation is undefined and EBSA’s enforcement varies by region

• Process agreements are not a substitution for regulation

• Regulation through litigation is not fair in the US legal system

• Immediate priorities are:

• Definition of fair market value

• Expectations on valuation methodology

• Standards for value of control, financing vehicles

• Standards for what is a good-faith negotiation of employer securities

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Developing the Insurance Marketplace

• Insurers do not understand ESOP transactions

• Premiums are increasing at an unsustainable rate

• How can we promote a healthy insurance marketplace?

2023 Annual Conference – Kansas City, MO

Decrease Risk of Costly Litigation

• ESOP litigation is attractive to plaintiff’s lawyers because rewards (fees) are high, and settlements are likely

• Solutions:

• Cap attorney’s fees much like the medical industry

• Arbitration

• Increased pleading standards

• Other?

2023 Annual Conference – Kansas City, MO

Association to Support Trustees

• Establish acceptable standards of practice and ethics

• Example: ABA, AMA, AICPA, even dog breeders!

• Self regulation

• Assist in the courtroom with expert witnesses?

• Promote communication among trustees

• Provide training

• Encourage and support new trustees

2023 Annual Conference – Kansas City, MO

Pulling it all Together

• ESOPs were created in 1976 to promote employee ownership

• Congress’s express intent was to avoid barriers to establishment and successful operation

• Litigation and DOL oversight have become problematic

• ESOP Trustees are the lightening rod

• Acting as professional shareholder has a high exposure to risk

• Standards of valuation and due diligence are unclear

• What solutions exist to resolve this challenge?

2023 Annual Conference – Kansas City, MO

Secret Word Heartland

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO Thank you! Questions? Olivia Kowalski Vice President Chartwell Olivia.Kowalski@chartwellfa.com Christian Nemeth Partner McDermott Will & Emory jcnemeth@mwe.com Mitchell Miller Vice President GreatBanc Trust Company mmiller@greatbanctrust.com

Engaging, Innovative, and Interactive Ways to Celebrate Employee Ownership and Educate Professionals About Being an Employee-Owner

2023 Annual Conference – Kansas City, MO

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

2023 Annual Conference – Kansas City, MO

Black & Veatch Background

10,600+

2023 Annual Conference – Kansas City, MO
and Founded
Professionals
120+ Offices
1915
Continents 6
Power #2 Telecom #6 Solar Power #2 Petrochemical #8 Hydro
#4 Water Supply #8
Projects on
ENR Rankings: Ranked #13 in Top 500 Design Firms
Plants
100%
LGBTQ
Headquarters
Overland Park,
7,000 Active Projects Worldwide 8th largest
employee-owned company in the U.S. 2022 Best Places to Work for
Equality voted Global
in
KS

Black & Veatch Background

Mission: Why we exist

Building a world of difference through innovation in sustainable infrastructure

Vision: What future we aspire to achieve We work relentlessly to solve humanity’s critical infrastructure challenges

Values: What we believe and how we behave Safety | Accountability | Collaboration | Entrepreneurship | Integrity | Ownership | Respect

#13 Top 500 Design Firms

#2 Power

#6 Telecom

#2 Solar Power

#8 Water

#4 Hydro Plants

#8 Refineries & Petrochem ical Plants

#2 Towers and Antennae

#11 Sewer & Waste

Current Engineering News-Record rankings.

2023 Annual Conference – Kansas City, MO

Focus on Three Pillars

2023 Annual Conference – Kansas City, MO
EDUCATE CELEBRAT E
ENGAGE

ENGAGE – Employee Ownership Network Structure

Executiv

Sponsors CFO &

Culture Committee

Treasurer

Chief Operating Officer

VP of Change Enablement

AVP of Global Benefits

Director of Talent Management & Talent

Development

Director of Finance, Resource Management

Director of Benefits

International Leader

Benefits

Talent Development

Culture

Marketing (Internal/External)

Others as needed

Support Team

Employee Ownership Relations Team

Treasurer*

Communications

Marketing & Events

Change Enablement

r

Network

Network Leaders

Sector Finance Officers

Lead HR Partners

Office Leaders

Domestic Ambassadors

International Ambassadors

2023 Annual Conference – Kansas City, MO Engage
e
Core Team CHRO
e
Steering Committe
Ambassado

ENGAGE – Employee Ownership Structure

Role, Purpose, and Meeting Cadence Engage

Role Purpose Meeting Cadence

Executive Sponsors Review and approve overall strategy, objectives, and key activities

People & Culture Committee

Ensure Employee Ownership strategy and key activities are aligned with [the company’s] overall [culture] strategy and goals

Steering Committee

Provide guidance to the Core Team and liaise with Executive Sponsors and the [culture committee]

Core Team

Advocate and promote [the company’s] ownership culture by establishing the Employee Ownership strategy and leading support team initiatives

Support Team

Lead and support development and execution of Employee Ownership activities that promote [the company’s] ownership culture and encourage ownership thinking and behaviors

Ambassador Network

Establish and implement action plans to advocate and promote [the company’s] ownership culture and initiatives that encourage ownership thinking and behaviors with the goal of transforming all professionals into engaged employee-owners who drive company growth

Quarterly Updates

Quarterly Updates

Bi-monthly (45 minutes)

Monthly (45 minutes)

Ad hoc based on activities

Quarterly

2023 Annual Conference – Kansas City, MO

ENGAGE – Employee Ownership Structure

Ambassador Network Members

Network Leaders

Identify and guide Ambassadors and act as sponsors for the deployment of all [company] Employee Ownership initiatives

Domestic Ambassadors

Global Reach

International Ambassadors

• Sector Finance Officers

• Lead HR Partners

• Office Leaders

• Regional domestic professionals

• Headquarters-based professionals

• Geographic representation across eligible international countries

Engage

• Ambassadors will be selected based on a combination of recommendations by Network Leaders and interest and passion about employee ownership from professionals

• Ambassadors will serve 2- or 3-year terms

2023 Annual Conference – Kansas City, MO

Domestic professionals

ENGAGE – Global Reach at Black & Veatch

International professionals

99% of Black & Veatch professionals are a part of a BV employee ownership plan

2023 Annual Conference – Kansas City, MO
Engage

EDUCATE – Three Questions

1 2 3

What does being an owner mean?

What are the benefits for you as an owner?

What are the expectations from you as an owner?

2023 Annual Conference – Kansas City, MO EDUCATE

EDUCATE – Financial Acumen New

Professional Orientation

• New Professional Orientation every other month

• “We Own It, Let’s Grow It! – How We Make Money and Grow BV Value”

• Lead by CFO, Treasurer, and Employee Ownership Relations (or some combination of the three)

• What does this orientation look like?

Company objectives and how we make money/drivers of our business

How we measure financial performance and why employeeowners should care

Drivers of the company’s valuation Live

2023 Annual Conference – Kansas City, MO EDUCATE
Q&A

EDUCATE – How BV’s ESOP Works

Annual contributions made by BV

2023 Annual Conference – Kansas City, MO
EDUCATE
12
BV ownership account BV ownership account
First day as a BV professional Happy Retirement!

EDUCATE – Valuation Trivia

Goal

Educate employee-owners on how BV is valued and the primary drivers of our annual stock price by launching the “All About Valuation” video and trivia questions based on information shared in the video

Platform

Microsoft Forms

Results and Prizes

Raffle drawing using Forms

export, winners announced at Owners’ Meeting

Communication

All Company email, article on internal homepage, Yammer posts

2023 Annual Conference – Kansas City, MO EDUCATE

EDUCATE – Employee Ownership Month

“Your Ownership Plan: Myth or Fact?”

Description

Find out everything you never knew about your Ownership Plan in this fun, interactive session led by a panel of experts

Panelists

HR Benefits and Employee Ownership Relations teams

“All About EO”

Description

Join the fun in this trivia game, where our panelists will test your employee ownership knowledge

Panelists

CEO, CFO, and international leaders

“What More Can I Do? Bingo”

Description

This Bingo game will help you learn what more you can do to grow our enterprise value – and have some fun too

Panelists

Leaders and representatives from market sectors and corporate functions

What More Can I Do? Ownership Plans

All About Employee Ownership

2023 Annual Conference – Kansas City, MO EDUCATE

EDUCATE – “All About EO” Trivia!

crowd.live/59K39

• Scan the QR code with your phone camera and follow the link

• Input a nickname for yourself to enter the game

• Answer the questions as we go and test your general Employee Ownership and NCEO knowledge!

2023 Annual Conference – Kansas City, MO EDUCATE

CELEBRATE – Annual Owners’ Meeting

Day 1 Agenda

❑ Safety and Company Values

Moments

❑ State of the Business – CEO

Day 2 Agenda

❑ 2023 Focus Behaviors – CEO

❑ Financial Update and Stock Price

Reveal – CFO

❑ Annual Awards

❑ Videos from Global Leaders

❑ 2023 Strategy – CEO

❑ Employer Value Proposition and Culture – CHRO

❑ Leader Perspectives

❑ Annual Awards ❑ Q&A

❑ Q&A

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Culture at the Owners’ Meeting

Performance

Management

Employee Ownership

Network partners with the Culture Committee

Celebrations & Rewards

Diversity, Equity & Inclusion

Culture

Company Values

Refreshers

Employer Value

Proposition

How we are going to market ourselves for recruiting and retention throughout this year

Cultural Workshops

2023 Annual Conference – Kansas City, MO
CELEBRATE

CELEBRATE – Finances at the Owners’ Meeting

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Contribution at the Owners’ Meeting and CEO Communication

2023 Annual Conference – Kansas City, MO CELEBRATE
Annual Contribution % 2018 2019 2020 2021 2022 2018 stock price 2019 stock price 2020 stock price 2021 stock price 2022 stock price

CELEBRATE – Communicating the Contribution

What’s included in the CEO’s communication?

What it means to be an employee-owner

Annual Contribution percentage

Timing of when employee-owners will see the annual contribution in their ownership accounts

Links to BV Employee Ownership resources and Owners’ participant accounts site

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Vesting Ceremony

Couple the vesting ceremony with an education moment prior to the ceremony

Create a video explaining how an employee-owner becomes vested and what that means for them going forward

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Vesting Ceremony

• Hold in conjunction with Employee Ownership Month

• “Vest” all ESOP-vested employee-owners to-date

• During the ceremony, “vest” a handful of leaders on stage who will then “vest” a handful of professionals

• Future vesting ceremonies to honor those employeeowners that have vested in that past year

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Yammer Campaign

2023 Annual Conference – Kansas City, MO CELEBRATE
Optimize Participation
Clarify Messaging Improve Engagement
Communications should be crafted and executed to:

CELEBRATE – Yammer Campaign

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Yammer Campaign

Bring leaders on board prior to campaign launch – executives, sector leads, HR

Post articles and “Together, we…” video on company’s internal homepage

Use social media to share about the celebration day, yammer campaign and ownership month

2023 Annual Conference – Kansas City, MO CELEBRATE

CELEBRATE – Employee Ownership Celebration

2023 Annual Conference – Kansas City, MO CELEBRATE

BV 2023 Key Events – Engage, Educate, and Celebrate

ESOP and GEO contribution announcement

Valuation education and trivia game

Owners’ Meeting with first annual stock price reveal

New Professional Financial Acumen Training – “We own it, Let’s grow it”

Ambassador Network Rollout

People Conference session – Employee-Owner Rights and Responsibilities

Annual Employee Ownership Survey

Intern Session – BV’s Employee Ownership Benefit

Recruiter Training – BV’s Employee Ownership Benefit

Employee Ownership Month celebration, video, and sessions

Vesting education and recognition celebration (as part of EO Month)

2023 Annual Conference – Kansas City, MO CELEBRATE
JAN FEB FEB MAY EVERY 2 MOS JUN JUL AUG AUG OCT OCT

Secret Word for CE

Sauce

2023 Annual Conference – Kansas City, MO

Employee Ownership Q&A

2023 Annual Conference – Kansas City, MO CELEBRATE

Thank You!

2023 Annual Conference – Kansas City, MO
Amanda Clark Black & Veatch
2023 Annual Conference – Kansas City, MO Managing Conflicts of Interest with the Board of Directors Danielle Montesano Managing Director J.P. Morgan 312.336.0951 danielle.montesano@jpmorgan.com
J.P. Morgan
2023 Annual Conference – Kansas City, MO Managing Conflicts of Interest with the Board of Directors Chelsea McCarthy Partner Holland & Knight LLP 312.715.5768 chelsea.mccarthy@hklaw.com Holland & Knight

CE Requirements - Onsite

1.Scan the session QR code upon entering the breakout room, using the Annual Conference Event app

2.Participate in the instructor-led question / discussion

3.Input the secret word in the CE Session Survey. The secret word will be revealed in the end of the is presentation

4.Complete the CE survey via the session page in the mobile app

2023 Annual Conference – Kansas City, MO

Learning Objectives

At the end of the session, you will be able to:

1. Identify a conflict of interest within board of directors

2. Understand how to minimize board conflicts of interest

3. Recognize special situations that present greater risk

2023 Annual Conference – Kansas City, MO

Covered in Today’s Session:

1. Overview Board Governance

2. Conflict of Interest Defined

3. Minimizing Conflicts of Interest

4. Special Situations

2023 Annual Conference – Kansas City, MO
Agenda

• Information provided in presentation does not, and is not intended to, constitute legal advice. We are not your attorneys and are not creating an attorney-client relationship by participating in this presentation or answering questions. Participants should contact their counsel to seek advice on a particular legal matter.

• Material presented herein represents the views of the presenters and not their employers.

2023 Annual Conference – Kansas City, MO
Disclaimer

General Board Duties

• Grow shareholder value

• Set corporate strategy

• Declare dividends

• Review corporate financial statements

• Appoint, monitor, remove senior officers

• Determine CEO, senior officer compensation

• Evaluate/approve significant corporate transactions (e.g., acquisitions, merger or sale)

• Succession planning

• Monitor risk

2023 Annual Conference – Kansas City, MO

Additional ESOP Board Duties

• Appoint, monitor and (if necessary) remove the trustee

• Understand the ESOP valuation

• Understand/monitor the company’s repurchase obligation

• Adopt, amend and terminate the ESOP

• Communicate with trustee on significant corporate matters (sale, purchases, executive compensation, valuation)

• Determine, approve contributions to the ESOP

• Appoint the plan administrator

2023 Annual Conference – Kansas City, MO

ESOP Company Stakeholders

BOARD

• Duty to all shareholders, including the ESOP as a shareholder

• Governing body

• Plan Sponsor/Administrator

• Appoints/monitors Trustee

TRUSTEE

• Shareholder of record

• Duty to ESOP participants; no duty to other shareholders

• Duty to avoid conflicts

• Duty to act exclusively in interests of participants and beneficiaries

SENIOR MANAGEMENT

• Day-to-day operations

• Report to CEO

• Generally, no ERISA fiduciary duty unless otherwise specified

2023 Annual Conference – Kansas City, MO

Relationship Between Stakeholders

ESOP

ELECTS

BOARD

APPOINTS

TRUSTEE BOARD OF DIRECTORS COMPANY MANAGEMENT

OFFICERS

ENGAGES

TRUSTEE

2023 Annual Conference – Kansas City, MO

What is a “conflict of interest”?

“A real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties.”

Black’s Law Dictionary (11th ed. 2019)

“A situation in which an individual may profit personally from decisions made in his or her official capacity.”

Oxford English Dictionary

2023 Annual Conference – Kansas City, MO

Board Conflicts of Interest: Examples

• Executive compensation

Transacting business with the company • Real estate transactions

Corporate opportunities

2023 Annual Conference – Kansas City, MO

Legal Standard for Board Decisions

Business Judgment Rule:

– Director decisions upheld as long as they were made in good faith, with the care that a reasonably prudent person would use, and with the reasonable belief that the director is acting in the best interests of the corporation

Burden on plaintiff

Entire Fairness Standard:

– Applies where directors had a conflict of interest in corporate action. Directors then need to substantive and procedural fairness

Burden on director to prove entire fairness

ERISA Prudence Standard:

Act with care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use

2023 Annual Conference – Kansas City, MO

Mitigating Board Conflicts

• Identify, document and disclose conflict

• Remove/sequester conflicted person from decision

• Outside Board Members

• Committee Governance, Special Committees

2023 Annual Conference – Kansas City, MO

Mitigating Board Conflicts

• Independent fiduciary (purchase or sale transaction)

• Hire independent advisors

• Independent studies (compensation)

• Governance documents

2023 Annual Conference – Kansas City, MO

Outside Board Members

• Not an employee (former employee?)

• Not another stakeholder (shareholder, customer, vendor)

• Best practice, not required

• Functional experience (ESOP, Finance, Governance)

2023 Annual Conference – Kansas City, MO

Board Committees

Audit

- Review/approve financial statements, CapEx, projections

- Auditor Meetings

- Review annual share valuation

- Risk assessment and legal exposures

- Regulatory compliance

Compensation

Governance Nominating

- Determine Board, CEO compensation and performance

- Benefits oversight

- Compensation structure (base pay, bonus program, SARs)

- Committee structure

- Director compliance

- Succession planning

- Trustee evaluation

- Board performance review/education

- DEI Initiatives

- Identifies and reviews new director candidates

- Nominates director candidates

- Identifies board needs

2023 Annual Conference – Kansas City, MO
BOARD

Special Committees

• Used for specific purpose (acquisition, sale) to avoid conflicts

• Ensure true isolation

• Delegate authority

• Avoid undue influence

• Caution with communications

2023 Annual Conference – Kansas City, MO

Governance Documents

• Trustee control provisions in bylaws and articles

• The “ERISA Carve Out” and directed trustees: Directed trustees are only required to follow “proper directions . . . which are made in accordance with the terms of the plan, and which are not contrary to” ERISA. 29 U.S.C. § 1103(a)(1)

2023 Annual Conference – Kansas City, MO

Special Situations: Sale of the Business

• Board members as shareholders

• Deal bonuses and incentives

• Rollover opportunity

• Employment agreements

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO
• Warrants/Stock Appreciation Rights
Independent
analysis
Special Situations: Executive Compensation • Executive compensation decisions
compensation

Special Situations: Valuation

• Board duties for annual valuation

–Confirm accuracy of financials

–Review draft report, if available

–Understand report –Potentially meet with trustee, financial advisor

• Board duty to monitor independent trustee in transaction

2023 Annual Conference – Kansas City, MO

Special Situations: Valuation

• Financial projections

–Who is preparing projections?

Who is reviewing/approving?

–Is there a conflict or bias?

• Consider use of valuation

Does plan distribution involve board member or senior management?

–Is director or senior management benefiting from transaction?

2023 Annual Conference – Kansas City, MO

Secret Word Len Dawson

2023 Annual Conference – Kansas City, MO

Questions?

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO Thank You For Attending! Chelsea McCarthy Holland & Knight LLP chelsea.mccarthy@hklaw.com Danielle Montesano Managing Director J.P. Morgan 312.336.0951 danielle.montesano@jpmorgan.com Chelsea McCarthy Partner Holland & Knight LLP 312.715.5768 chelsea.mccarthy@hklaw.com

Repurchase Obligation Funding Strategies

WillHeidbreder

JD, MBA, CPA, CLU

Principal Financial Group

Heidbreder.Will@principal.com

RonScheese

President & CEO, CPA

Andesa Services, Inc.

Ron.Scheese@andesaservices.com

RolandBurdett

President & CEO

Miklos Systems, Inc. (MSI)

rburdett@miklos.com

2023 Annual Conference – Kansas City, MO

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey.

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO
CE Requirements - Onsite

Learning Objectives

2023 Annual Conference – Kansas City, MO

First, What is a Repurchase Liability?

• The liability a company incurs when vested participants are entitled to receive distributions from an ESOP

• Closely held companies must provide the funding necessary to repurchase shares from ESOP participants owed a distribution

• Typical Repurchase “triggers”

o Retirement

o Death

o Disability

o Option to diversify*

o Terminations (voluntary and involuntary)

2023 Annual Conference – Kansas City, MO

How Much is the Liability?

• Companies often perform a repurchase obligation study to estimate their long-term liability

• This forecasting study is a projection of the distributions required when employees retire, die, become disabled, terminate employment, etc.

• Common factors that impact the calculation include

o Company growth rate

o Participant demographics

o Participant balances

o ESOP loans

o Distribution policy

2023 Annual Conference – Kansas City, MO

Strategies for Addressing the Liability

2023 Annual Conference – Kansas City, MO

Developing a “Sinking Fund”

Sinking Fund

No Funding

Years

2023 Annual Conference – Kansas City, MO

Corporate Owned Life Insurance (COLI)

• Companies of all sizes use life insurance as a tool for protecting their businesses.

• With traditional Corporate Owned Life Insurance (COLI), the company is the owner and beneficiary of the policy.

• Given that death is an ESOP RL triggering event, companies will acquire COLI on their key employees, particularly those with large ESOP balances.

2023 Annual Conference – Kansas City, MO

Comparison of Funding Methods Benefits

2023 Annual Conference – Kansas City, MO

Comparison of Funding Methods

Considerations

2023 Annual Conference – Kansas City, MO

COLI Considerations

• What are the company’s future liabilities over the next 10-20 years?

• Does the company have significant debt?

• Does the company have other commitments or opportunities?

• What other benefit plans does the company offer key employees?

• What is the availability of cash on an annual basis?

• What is the desired size of the reserve to be established?

• How much has the company set aside to date?

• Consider the impact to company cash if a death occurred with key employees

• Is the company a C corporation or S corporation?

2023 Annual Conference – Kansas City, MO

ABOUT ANDESA

Andesa is a leading, employee-owned provider of policy lifecycle solutions for the life insurance and annuities industry that offers modern cloud-based systems for transaction management and recordkeeping.

Andesa is the premier COLI solution provider in the industry – a highly complex / niche market.

We are the technology and services to those that sell (brokers) and underwrite (carriers) COLI products.

The Andesa ESOP

• The Company was founded in 1983

• Became an 8% ESOP in 2015 / 100% in 2020

• S-Corp / Early stage (focus on debt payoff) / 160 participants

• 2nd stage transaction funding – 95% Leveraged

• 65% Seller Notes/ 30% Bank Debt

• Principal – Recordkeeper

• Repurchase obligation

• Recirculation (Recycling) Funding Strategy

• Given materiality over the next 5 years, the RO will be funded by operating cashflow

• Principal My Perls tool used

2023 Annual Conference – Kansas City, MO

From Andesa’s Perspective – A Real-Life Example

• Set up COLI initially in the 90s to fund equity buy-out upon a shareholder’s death

• After the 2nd stage transaction, COLI used to fund debt upon a seller noteholder’s death

• Paying a significant but affordable amount of premium each year

• No payouts to date

• COLI covers 90% of the seller note balance

• Age of those covered – 45 to 85

• The underlying insurance products are term policies – no assets to manage or leverage for additional uses

• Upon payoff of debt, will consider COLI on individual employee-owners

2023 Annual Conference – Kansas City, MO

From MSI’s Perspective – A Real-Life Example

• Government Contractor, providing custom software, web, and database applications

• Founded in 1993, Became an ESOP in 2006, 100% in 2015

• Set up COLI initially in 2010

• Policies covered 1/3 of our employee base

• As we grew, that base shrunk to 1/5, so we insured another tranche in 2017 to get us to 1/2 of our employee base covered

• Paying a significant but affordable amount each year

• This year, we restructured it to stop paying on policies for employees who left us, brought them to “paid up” status

2023 Annual Conference – Kansas City, MO

Why Did We Choose This

• We wanted a set expense every year that we could plan for

• To smooth our ESOP Contributions

• We wanted an investment with a guaranteed “floor” Return on Investment

• We wanted a way to cover potentially large unplanned expenses in the case of large shareholders passing away

• We are building a “bank” for ourselves that we can borrow against

• For repurchase needs

• For other strategic company needs ... Acquisition?

2023 Annual Conference – Kansas City, MO

Led to Interesting Meetings

• New laws require us to get signatures from all insured employees

• We had a couple of interesting meetings explaining this … we explained it to everyone and then sent the forms to the specific individuals we were insuring

• A bit morbid, have the meetings with a dose of humor and sensitivity

• The message was – “We’re doing this to help your family in an unfortunate situation, and to ensure the sustainability of MSI.”

2023 Annual Conference – Kansas City, MO

Pay-Outs Have Happened, Unfortunately

• Unfortunately, we’ve had two of our insured employees pass away

• COLI enabled us to pay off their estates in full the following year

• Without COLI we couldn’t have helped the family when they needed it most

2023 Annual Conference – Kansas City, MO

MSI’s Lessons Learned

2023 Annual Conference – Kansas City, MO

Wrap - Learning Objectives

2023 Annual Conference – Kansas City, MO

Secret Word for CE

Kauffman

2023 Annual Conference – Kansas City, MO

Repurchase Obligation Funding Strategies

WillHeidbreder

JD, MBA, CPA, CLU

Principal Financial Group

Heidbreder.Will@principal.com

RonScheese

President & CEO, CPA

Andesa Services, Inc.

Ron.Scheese@andesaservices.com

RolandBurdett

President & CEO

Miklos Systems, Inc. (MSI)

rburdett@miklos.com

2023 Annual Conference – Kansas City, MO

Questions?

2023 Annual Conference – Kansas City, MO

CE Requirements - Onsite

1. Scan the session QR code upon entering the breakout room, using the Annual Conference Event app

2. Participate in the instructor-led question / discussion

3. Complete the CE survey via the session page in the mobile app

2023 Annual Conference – Kansas City, MO

The Advantages of Video Media in ESOP Education

Kyla Alterman

Consultant

Jacob Covell

Media Specialist

2023 Annual Conference – Kansas City, MO

3, 2, 1…ACTION

• Break into groups of 3

• One person start “filming”

• Answer one question:

• What does employee ownership mean to you?

• What is the most important thing employees need to know about employee ownership?

2023 Annual Conference – Kansas City, MO

Why use video?

Know your “why” before starting video production!

• Provide consistent message for all employees

• To be viewed in employees’ own time

• Reach a dispersed workforce

• Standardize ESOP onboarding

• Build employee owner skills

• Keep ESOP top-of-mind

• Communicate important information in a new/engaging way

• Teach ESOP basics in small chunks

• Reinforce other meetings and training

2023 Annual Conference – Kansas City, MO
An Employee-Owned North American manufacturing Company 2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO Educating 809 Employees Across 7 States & 3 Countries
2023 Annual Conference – Kansas City, MO

Collaboration with Workplace Development

2023 Annual Conference – Kansas City, MO

CEO Program

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO

Collaboration with Workplace Development - Our Process

1. Identify needed video modules.

2. Collaborate and write scripts for your videos.

3. Storyboard and offer visualizations.

4. Capture content, pull from existing catalogue or stock website.

5. Video editing process. Go through multiple edits with your team to ensure the video captures your message in a clear way.

2023 Annual Conference – Kansas City, MO

Resources / Tools

• Find employees that are excited & willing to work with you.

• Document everything related to your educational series.

• Let other locations know what you're looking for.

• Find a stock photo/video site that fits your needs to fill in the gaps.

• Hire an editor to put your series together if you don’t have an in-house team.

• Find a testing system that works for your team.

2023 Annual Conference – Kansas City, MO

Tracking Results

2023 Annual Conference – Kansas City, MO

Questions for Jake?

2023 Annual Conference – Kansas City, MO

What to consider

• What quality do you want the video to be?

• Do you have a budget?

• Do you have a team to create or co-create the video?

• Do you want to hire professionals to create or co-create with you?

• Who will write the script and storyboard the video?

• How will the video be viewed/where will it be kept?

2023 Annual Conference – Kansas City, MO

Ideas for videos

Recorded Teams/ Zoom call

Hybrid interview with slides or animation

Animated

PowerPoint

Professional

Videography

Professionally

Animated

2023 Annual Conference – Kansas City, MO

MyPath Animated CEO Program

• 2-5 minute training videos

• Short quiz after each video

• Assistance with script and storyboards

• Hired a professional animator

• AACE-Award winning program

• Helps employees appreciate ESOP

• 2,000 employee owners with typical 50% turnover

• Among employees who earned CEO certification, retention rate is 97%

2023 Annual Conference – Kansas City, MO

OCP Monthly Videos

• Communicate ESOP basics and company values

• Messages reinforced with biweekly nuggets

• Interviews with key people involved in the ESOP

• Committee involved in selecting new topics

2023 Annual Conference – Kansas City, MO

D.C. Elevator Statement Video

• Personalized training that uses annual ESOP statement to communicate ESOP plan's benefits

• Shows employee owners how the ESOP works and builds ownership culture

2023 Annual Conference – Kansas City, MO

Get employees to watch

• Enter in a raffle

• Swag & prizes

• Make it mandatory

• Lead up to in-person event • Watch in group meetings

What have you done at your company to get participation?

• Build into onboarding

2023 Annual Conference – Kansas City, MO
2023 Annual Conference – Kansas City, MO Sign up for Workplace Development’s free e-news letter to hear tips and stories about what ESOPs are doing to communicate their plan and build ownership culture. Or contact us at kalterman@workplacedevelopment.com Questions for Kyla or Jake? THANK YOU!!!!

Secret Word BBQ

2023 Annual Conference – Kansas City, MO

The Advantages of Video Media in ESOP Education

Kyla Alterman

Consultant

kalterman@workplacedevel opment.com

Jacob Covell Media Specialist

2023 Annual Conference – Kansas City, MO

Pre-Feasibility Checklist: Are You a Good Candidate for an ESOP

Dawn

Schatz Brown Glassman LLP

Dir. Tel.: (860) 231-1054

Cell: (860) 490-5481

Rschatz@esopplus.com

Prairie Capital Advisors, Inc.

Dir. Tel.: (404) 809-2443

Cell: (678) 699-2125

mmcginley@prairiecap.com

Executive Vice President TI-TRUST, Inc.

Dir. Tel.: (217) 221-8654

Cell: (217) 430-1664

dawn.g@ti-trust.com

2023 Annual Conference – Kansas City, MO
Robert F. Schatz Partner Michael McGinley Managing Director Goestenkors

CE Requirements - Onsite

1. Scan the session QR Code on the door or directional signage nearby

2. Engage in the session content for all 60 minutes.

3. Input the secret word in the CE Session Survey. The secret word will be revealed in the speaker's presentation.

4. Complete the CE Survey

2023 Annual Conference – Kansas City, MO

Today’s Speakers

2023 Annual Conference – Kansas City, MO
Schatz Brown Glassman LLP
Robert
F. Schatz Partner ESOP PLUS:
Dir. Tel.: (860) 231-1054 Cell: (860) 490-5481 Email: Rschatz@esopplus.com
2023 Annual Conference – Kansas City, MO
Speakers Michael McGinley Managing Director Prairie Capital Advisors, Inc. Dir. Tel.: (404) 809-2443 Cell: (678) 699-2125 Email: mmcginley@prairiecap.com
Today’s
2023 Annual Conference – Kansas City, MO Today’s Speakers Dawn Goestenkors Executive Vice President TI-TRUST, Inc. Dir. Tel.: (217) 221-8654 Cell: (217) 430-1664 Email: dawn.g@ti-trust.com

Learning Objectives

• Determine if the company is or is not a good candidate to establish an ESOP, including whether an ESOP transaction will accomplish the company's and its employees' objectives

• Verify if the owner (selling to the ESOP) is a good candidate to undertake an ESOP transaction, including whether an ESOP transaction will accomplish the owner's objectives

• Understand the benefits of an ESOP and help the owner determine both the value of his or her company and what he or she can expect to receive (i.e., managing expectation)

2023 Annual Conference – Kansas City, MO

Who is a Good/Bad ESOP Candidate?

• Owner’s motivation and objectives:

• Are they seeking to implement an exit strategy or desire some liquidity?

• Will they continue with the Company after the Transaction?

• Do the Owners want to keep the company intact with minimal disruption?

• Do the Owners seek to increase employee productivity?

• Do the Owners desire to utilize corporate tax savings to increase growth/accelerate debt repayment?

• Succession Management team:

• Is there in place (or will there be) a competent succession management team?

• Company Financial Condition:

• Is the Company Profitable?

• Does the Company have a strong predictable revenue stream and cash flow?

• Does the Co. have manageable prospective capital expenditure requirements?

2023 Annual Conference – Kansas City, MO

Who is a Good/Bad ESOP Candidate? (Cont.)

• Realistic Assessment of Company Value:

• Are the Owners willing to accept FMV for their stock?

• Are the Owners looking to be paid out all at once or over time?

• Do the Owners desire to utilize corporate tax savings to increase growth/accelerate debt repayment?

• Employee Census:

• Does the Company employ more than 15 employees?

• Ability to repay ESOP debt:

• Does the Company have the ability to make recurring contributions to repay the ESOP loan?

2023 Annual Conference – Kansas City, MO

Who is a Good/Bad ESOP Candidate? (Cont.)

 Corporate culture:

 Does the Company foster an “ownership culture”?

 When Employees own a piece of the company, studies show increased motivation, productivity, profitability, retention, etc.

• Post Closing Governance:

 If the Owners are staying with the Company, are they willing to allow for independent directors to control or be on the Board?

 Post Closing Involvement in the Business:

 Are the Owners willing to dilute “control” at the Board level and/or at the Management level?

2023 Annual Conference – Kansas City, MO

The Candidate Checklist (Yes or Not)

Our company operates in more than one state

Our company’s annual net profit before taxes is greater than $600,000

The company’s annual EBITDA is greater than $3,000,000

If our company employs more than 15 non-union employees

If our company employs more than 100 non-union employees

Our owners (which could be family, partners, investors, trustees, and/or corporate shareholder(s)) are now discussing or are interested in selling their stock

Our company has experienced continued increases in profitability in the last two years

2023 Annual Conference – Kansas City, MO

The Candidate Checklist (Yes or Not) (Cont.)

Our company is a C corporation, with a sizable block of shares owned by one or more shareholders wanting to sell their shares

Our company is an S corporation, and distributions to shareholders is more than $100,000 a year to help pay their taxes

Our company currently contributes to one or more qualified retirement plans for its employees (e.g., 401k plan, profit sharing plan, defined benefit plan, etc.)

Our company recently had a valuation report/analysis and the value was significant

Our management team is ready or could be ready in 3 to 5 years to assume most of the responsibilities to run the company without the current president/owner

2023 Annual Conference – Kansas City, MO

The Candidate Checklist (Yes or Not) (Cont.)

There are family members identified or capable for management succession or to run the company

Our company’s owners/executives desire to work less than usual while still running the company

The company’s marketplace is growing, or the company is growing, in spite of the marketplace

The company’s owners are concerned that if they sell to an outside 3rd party, the employees will be harmed or the company will not retain the legacy of the previous owners

The company’s owners have buy-sell agreements in place to provide a smooth ownership transition

2023 Annual Conference – Kansas City, MO

The Candidate Checklist (Yes or Not) (Cont.)

The company has received serious offers to purchase the company (by management or third parties) and/or the owners are looking for an alternative buyer

The company tries to reduce company taxes by paying significant compensation, fringe benefits or other compensation/accounting methods

The company currently pays, believes in, or is interested in rewarding employees with incentive compensation, for the success they create for the company

The company’s owners already share management information, such as the company’s financial and operational performance, to managers and other key employees

2023 Annual Conference – Kansas City, MO

Secret Word Current

2023 Annual Conference – Kansas City, MO

Questions?

2023 Annual Conference – Kansas City, MO

Thank You for Attending!

Cell: (860) 490-548

2023 Annual Conference – Kansas City, MO
Robert F. Schatz Partner Schatz Brown Glassman LLP
(860) 231-1054
1 RSchatz@
Michael McGinley Managing Director Prairie Capital Advisors, Inc. Dir. Tel.: (404) 809-2443 Cell: (678) 699-2125 mmcginley@prairiecap.com Dawn Goestenkors Executive Vice President TI-TRUST, Inc. Dir. Tel.: (217) 221-8654 Cell: (217) 430-1664 Email: dawn.g@ti-trust.com
esopplus.com

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