AC 23 Concurrent Session 8

Common Valuation Pitfalls

Patrick Schmidt

Seth Webber

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.

Common Valuation Pitfalls

Today’s Agenda

• Introductions

• Summary of Valuation Approaches

• Cost Approach • Market Approach • Income Approach

• Pitfalls within the Cost Approach

• Insufficient cash flows to support asset values

Common Valuation Pitfalls

Agenda – Continued:

• Pitfalls within the Market Approach

• Guideline Public Companies (GPC) Method

• Comparability of selected guideline companies (“comps”)

• GPC Multiples and unsupported adjustments

• Guideline Transactions or M&A Method

• Mismatch between Industry and Comps

• Misused Metrics

Common Valuation Pitfalls

• Pitfalls within the Income Approach

• Unrealistic or Untested Projections

• Cost of Capital Calculations

• General Pitfalls and Misunderstandings

• Benchmarking and Reconciling of Methods

• Lack of Control and Lack of Marketability Discounts

• Confusing Enterprise Value, Invested Capital and Equity Value • Q&A

Valuation Method Overview

Cost Approach

• Net Asset Value (NAV)

• Estimated value of component assets and liabilities

• Might set the low end of value, depending on cash flow

Market Approach

• Guideline Public Companies (GPC) Method

• Uses public company valuation multiples as basis of value

• Involves search for and selection of comparable companies

Valuation Method Overview

Market Approach (Cont.)

• Guideline Transactions or M&A Method

• Search for transactions of similar businesses

• Application of valuation multiples to subject company

Income Approach

• Capitalization of Income or Cash Flow

• Uses single estimate of cash flow and capitalization rate

• Discounted Cash Flow

• Requires projection of future operations

Cost Approach Pitfalls

Net Asset Value Method

• Cost versus Fair Market Value

• What is being transacted?

• Excluded assets

• Excluded liabilities

• Shareholder notes / loans

• Intercompany notes / loans

• Net Working Capital

• Appraising Fixed Assets

Cost Approach Pitfalls

Net Asset Value Method

• Hard to appraise assets

• Specific use property

• Stores of value – with no associated cash flows

• Intangible asset valuation

• Cost to replicate – cost approach

• Relief from royalty – income approach

• Sales of similar intangibles –market

Market Approach Pitfalls

GPC Method

• Question: Is a public company comparable to a privately held business or and ESOP owned company?

• Size Considerations

• Access to Capital

• Breadth of services and geographic considerations

• Control and marketability considerations

• Imbedded growth expectations

Market Approach Pitfalls

Market Approach Pitfalls

Market Approach Pitfalls

Market Approach Pitfalls

Impact of Adjustments

Market Multiples Comparison by Database

Impact of Adjustments

Market Multiples Comparison by Database

Income Approach Pitfalls

Discounted Cash Flow (DCF) Method

• DCF is based on Management’s Projections

• Valuator’s Job is to assess the reliability of the projections

• How has company fared with past projections

• What is the process and who is involved?

• Top Down versus Bottom Up

Income Approach Pitfalls

Income Approach Pitfalls

Income Approach Pitfalls

Discounted Cash Flow (DCF) Method

• Equity Method vs. Invested Capital Method

• Determination of the Cost of Capital (WACC)

• Inputs for cost of debt should be based on next (marginal) dollar of borrowing

• Weights should be based on optimal capital structure (not company’s actual capital structure)

Income Approach Pitfalls

Income Approach Pitfalls

Example of Recent Transaction

• Partial to 100% ESOP Transaction

• Projections provided by management (see next slide)

• Projected performance significantly higher than past performance

• Impact on Cost of Capital

• Impact on Deal Structure

Income Approach Pitfalls

Example of Recent Transaction (Cont.)

• Deal structured with significant earnout (not on pace)

• Actual EBITDAE implies 53% reduction in purchase price

• Most recent projections significantly lower than those used in transaction

Income Approach Pitfalls

Diversion From Projected Revenue

Income Approach Pitfalls

General Pitfalls

• Benchmarking

• Reconciliation of Methods – Value Conclusion

• Discounts for Lack of Control and Lack of Marketability

• Repurchase Liability

• Misunderstandings on Levels of Value

• Enterprise Value

• Invested Capital

• Equity Value

The Phoenix Secret Word

Questions

Your Presenters Thank You!

Patrick Schmidt

Seth Webber

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.

Learning Objectives:

∙ Learn why MiniGames are one of the most effective tools used to “build a business of businesspeople”

∙ Know how to utilize the 10-step MiniGame Design Process template

∙ Discover how to strengthen their business of employee-owners by driving results through improved performance

$100,000

$9,000,000.00

The Company is The Product. Why Not Tie Education, Accountability and Incentives to Building a Great Organization?

Building a Business of Business People Who Think, Act & Feel Like Owners

$1,000

$9,038,400

$403,150

$48,976

Reason #1:

Great

Technicians Resist Learning About Business.

Reason #2: Business Has All the Elements of a Game

There is a goal

There are rules

There is a scoreboard

There is a reward for winning

Principles of The Game

That’s Line of Sight.

Principles of The Game

MiniGames are short - term improvement challenges designed to correct a weakness or pursue an opportunity within the company.

The Objective (or Right Driver) can be a financial or operational number.

1. Select the Objective Don’t Compete with “Us”

2. Set the Improvement Goal

From x to y by when?

Define the win

Define how to track progress

TIP: Avoid “All” or “Nothing” Goals

3. Estimate the Benefit

What’s the impact & the lasting change?

4. Identify the Players

• Who can really impact the goal?

5. Determine the Time Frame

• Shorter than the annual plan

• Long enough to change behavior

6. Create a Theme

7. Build a Scoreboard

&

Establish a Huddle Rhythm

Simple & easy to understand

Frequently scored & easily viewed

$9,000,000.00

3 Second Rule: Are We Winning or Losing?

$9,000,000.00

3 Second Rule: Are We Winning or Losing?

8. Decide on Rewards & Determine an Award Schedule

Think low on cash, high on fun

Set an award schedule:

30, 60 & 90 day Prizes: Small, Medium & Large!

Why Not Cash Rewards?

9. Play The Game

10. Celebrate the Win!

30 Days - Small

60 Days - Medium

90 Days - Large

Do it Right Not Twice

It Right, Not Twice!”

MiniGame ™

“Do

Scorecard for Obsolete/Slow Moving Inventory

Gross Inventory Reduction Needed for Max Bonus as of November: $6,581,000

Path to Max Bonus

Starring: Emily Crowell as Team Lead and Scorekeeper

Jeremy J, Josh F, Hannah G, John M as Buyers

Jeremey G, Spencer S, Louis C, Noah P, JC, Josh D, Jim L as Schedulers

2023 Annual Conference

Mary B, Somnuck, Dillon M as Core/Warehouse/Obsolete Inventory Team

AND THE DEFENDERS OF THE INVENTORY

CrossDepartmental

$6.2

M Cash

Secret Word

Zoo Bar

Creating Your Culture of Excellence Through Communication

Doug Bawel

Jasper Engines

Doug.Bawel@jasperengines.com

Cara Benningfield

FORVIS

Cara.Benningfield@forvis.com

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.

March 2, 2010

It Just Didn’t Feel Right….

1. Our Associates

2. Our Community

3. Our Customers

4. Schwenk - Bawel

Birthday Cards

Anniversary Letters

Christmas Cards

Elmo Coins

1. Financial Literacy

2. Income Statement

3. Balance Sheet

4. EBITDA

NEW ESOP/LOW FINANCIAL LITERACY

• $1 DOLLAR EXAMPLE

• HOW MANY CENTS OUT OF EVERY DOLLAR OF REVENUE DO WE KEEP?

•

EMPLOYEE ANSWERS MIGHT SURPRISE YOU!

HOW DOES A 100% LEVERAGED ESOP WORK? Work?

(Stock is initially held in suspense – unallocated)

(Receive combination of cash & note due from company for sale of stock)

How Does Repayment of a 100% Leveraged ESOP Work?

Tax-Free Cash Flow

OUTSIDE LENDER

Contribution (c)

COMPANY

ESOP

(Stock is released as loan is repaid)

Repay ESOP Loan

(c)

SELLER(S)

(a) Generally five- to seven-year amortization

(b) Interest only while outside lender is repaid

(c) ESOP loan generally repaid over 30 years or longer (no cash outlay)

Home Mortgage Example 2023

Home Mortgage Example 2024

Home Mortgage Example 2025

Who Communicates the Value?

IT DEPENDS…. ON THE CULTURE, ON THE COMPANY AND ON THE COMFORT LEVEL OF THE COMMUNICATOR.

MOST COMMON PEOPLE FOR COMMUNICATION:

• COMPANY LEADER – CEO / CFO

• HR REPRESENTATIVE

• THE ESOP COMMUNICATION COMMITTEE

• ESOP TRUSTEE

• ESOP APPRAISER

• SOME COMBINATION OF THE ABOVE

What Should You Communicate

CURRENT VALUE – CHANGE ??? • THE REASONS FOR CHANGE

FIXED FOR 1 YEAR

INDEPENDENT APPRAISER

VALUATION REVIEWED BY INDEPENDENT ACCOUNTANTS- ATTORNEY • REVIEWED BY TRUSTEE •

EFFECT ON RETIREMENT BENEFITS

What Should You Communicate?

Impact on retirement benefits examples

Be sure to highlight the increase as a % of pay the ESOP account provides

Things we Share…

FINANCIALS PAST YEAR

CAP X – TOP 7 EXPENSES

OUR PERFORMANCE COMPARED TO STOCK MARKET

BUDGET FOR CURRENT YEAR

FINANCIALS OF 1ST NEW QUARTER

Jasper Holdings Revenue

1468 / 58% HAVE $50,000+

946 / 37% HAVE $100,000+

40 Year Distribution Schedule “Forever”

$367 Million

Secret Word

The Mercury Room

Thank You!

Doug Bawel

Doug.Bawel@jasperengines.com

ESOP Board of Director Responsibilities in the Face of Economic Headwinds

Elizabeth Goltermann

KI Industries, Inc.

John Schumacher

True Financial POV, LLC

egoltermann@kiindustries.com

JCS@tfpov.com

David Solomon

Levenfeld Pearlstein, LLC

dsolomon@lplegal.com

Patrick Stoltz

Wintrust

pstoltz@wintrust.com

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.

Scan to Access Presentation Online

❑ Impact of Current Economic Headwinds on ESOP Valuations

❑ Commentary on Current ESOP Financing / Credit Environment / Flow of Capital

❑ Shaping ESOP BOD Leadership: Economic Prosperity versus Recessionary Headwinds

Background on ESOP Valuation

❑ Valuation Front & Center in ESOP-Owned Companies

⮚ Valuation / Fairness Opinion on ESOP Implementation

⮚ ESOPs valued annually thereafter

❑ ESOP Valuations Used for:

⮚ Compliance with U.S. DOL regulations

⮚ Amount paid to terminating & retiring ESOP participants

⮚ Calculation of value of warrants & synthetic equity

⮚ Determination of current year’s plan benefit

Economic Headwinds & ESOP Valuation

Primary Input Impacted by Headwinds: WACC

Economic Headwinds & ESOP Valuation – cont.

Sample DCF Method – w/ WACC Sensitivity

Sample DCF – WACC & Margin Sensitivity

ESOP Financing Primer

❑ Is financing an ESOP owned entity different from conventional ownership structures

⮚ Collateralized lending vs. Cash flow lending

❑ Are there capital providers that know / understand ESOPs

⮚ Understanding non-cash ESOP benefit levels

⮚ Repurchase Obligation

⮚ Acquisition financing

❑ How do I know how much third-party capital to obtain

❑ What are the general types of financing available

⮚ Senior debt vs. Junior debt (see next slide)

The Capital Structure

REVOLVER

TERM LOAN A

PRIVATE PLACEMENT NOTES (SECURED & UNSECURED)

LOAN MARKET

Cost to Issuer Risk to Investor Expected Return to Investor

SENIOR DEBT

TERM LOAN B SENIOR SECURED NOTES

2ND LIEN TERM LOAN

SENIOR SECURED & UNSECURED NOTES

SENIOR & JUNIOR

BOND MARKET

JUNIOR DEBT

SUBORDINATED NOTES / MEZZANINE DEBT

CONVERTIBLE DEBENTURES

PREFERRED STOCK

EQUITY

COMMON STOCK

EQUITY MARKET

Current ESOP Financing Environment

❑ Are the capital market conditions favorable today?

⮚ Bank debt still widely available and competitive

⮚ Leverage multiples are modestly lower

⮚ Companies with challenged performance will require longer due diligence

⮚ Well prepared companies / strong business models will always have available capital markets

❑ How do I prepare for a financing

❑ Typical bank due diligence process:

⮚ 8 weeks

⮚ ESOP and Company selecting experienced advisors

Ongoing Board Considerations for ESOPs

❑ Adopt, amend and terminate the ESOP

❑ Determine ESOP Benefit Levels

❑ Oversee the ESOP Distribution Policy

❑ Determine and manage Repurchase Obligations

❑ Approve capital allocation decisions

❑ Monitor the vitality of the employee ownership culture

❑ Monitoring the Trustee and Annual Valuation Cycle

ESOP BOD Issues During Economic Headwinds

❑ Reduced stock value’s impact on ESOP benefit levels

❑ Employee perception of the ESOP’s value

❑ Changing relative components of compensation with changing benefit levels

❑ Current liquidity needs versus future value projections -- accelerate or slow down ESOP distributions?

❑ Increasing interest rates affect on current levels of seller debt / refinancing decisions

❑ Revisit share repurchase strategies – recycle, redeem, or releverage?

General BOD Issues – Tailwinds vs. Headwinds

Oversight/Focus Areas Considerations during Economic Tailwinds Considerations during Economic Headwinds

Pricing/Margins

Higher volumes may camouflage outdated pricing and purchasing practices

Firm becomes more proactive on pricing, higher focus on cost control.

Liquidity/Solvency

BOD may annually review balance sheet and borrowing capacity?

More extensive oversight and tighter coordination with Company's CFO

Human Capital Impact

Greater willingness to overpay for talent

May be considering RIFs, their effect on ESOP culture enhancement, and also consider partial plan termination; and the importance of building the right talent.

Employee Communications

Often largely on auto-pilot in increasing share price environment

Custom messaging that addresses broad array of issues; the value of ESOP, tax benefits to employees, long term retirement planning and the future of the business

Strategy

Focus on competitive advantage during growing economic environment Focus on risk mitigation and finding targeted strategic opportunities

Management Incentives

Structured around revenue gains, promotes risk taking

Promotes risk management / closer financial monitoring

Questions for participants:

• Do you anticipate having the ESOP be a topic on the agenda of more of your board meetings this year in light of the uncertain economic environment?

• What, if anything, has changed in the last 12-18 months in discussions with your lenders (frequency of meetings, topics of conversation, leverage levels, etc.)?

• If your 2022 share value declines YOY, how will you change your communication to participants?

• How often does your board normally assess repurchase obligation projections and distribution policies, and will you do so in 2023 even if “off cycle”?

• What other opportunities might your board find embedded in all of this uncertainty?

Shark Bar Secret Word

ESOP Company Boards –Three Case Studies

Senior Vice-President

GreatBanc Trust Co.

Sandy Shoemaker President Shoemaker Consulting

Scot Storjohann

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.

Discussion Topics

• Brief corporate governance overview

• Case Study #1 – High Functioning Board

• Case Study #2 – New ESOP Board

• Case Study #3 – Dysfunctional Board

• Q&A

• Appendix with additional data

Role of the Board

• Grow shareholder value

• Set corporate goals, strategy and vision

• Appoint and evaluate CEO

• Advise leadership team

• Determine senior officer compensation

• Establish corporate conduct and standards

• Monitor financial performance and approve projections

• Declare dividends

• Evaluate and approve offers to buy or sell

• Facilitate succession planning

Role of the Board

In relation to the ESOP…

• Adopt, amend and terminate ESOP

• Appoint and monitor ESOP trustee

• Direct trustee per ESOP documents

• Appoint ESOP Administration Committee

• Approve ESOP contributions, distributions and dividends

• Evaluate repurchase obligation

• Understand ESOP valuation

High Functioning Board

Organization & Makeup

• 5-7 total board members

• 2+ independent board members

• Well-qualified & cover skill sets

• 3-4 meetings per year, scheduled a year in advance

• Committees: Audit, Compensation, Nomination & others as needed (Chaired by independent board members)

• Make sure bylaws line up with structure

High Functioning Board

Before the Board Meeting

• Meeting reminder out 3-4 weeks in advance (Date, time, location, etc.)

• Board packet out 3 weeks in advance

• Secure board data site? (Sharefile, OnBoard, etc.)

• Board members read & understand packet in advance

• Read minutes from prior meeting & provide comments

• Committees meet and are prepared to report at the board meeting

High Functioning Board

The Meeting

• Arrive early & make sure all tech is working

• Start on time & stick to the agenda!

• Take meeting minutes (Cover main topics & actions –Not too short or long)

• Consent agenda (must be prepared)

• CEO & financial reports (approve)

• Committee reports

• Key agenda items: M&A updates, Division or management reports, elect officers, reappoint professionals, reminders on future meetings

High Functioning Board

Between Meetings

• “Homework” & committee meetings

• CEO meetings with independent board members

• Independent board member tours –Know the company

• ESOP & industry education

New ESOP Board

• Determine composition, trustee requirements for external members

• These are not management meetings – Keep it strategic!

• Educate on Roles between Trustee, Board, Management

• Compensation committee – SARs, Execs, Bonuses

• Set agenda by quarter – Strategic planning, Succession, Valuation, Budgets, Projections, ESOP contribution, repurchase study

New ESOP Board

• Trustee to attend, at least for annual valuation presentation

• Determine reports to review and how much detail

• D&O insurance

• “Tone from the Top”

• Review by-laws for any updates

• “Nose in / Fingers out”

• Monitor trustee

• Bring in guests : Members of management

• Lots of documents to read

Dysfunctional Board Stories

• Do the opposite of a high functioning board.

• Board meeting vs. management meeting?

• Are we going to address the elephant in the room?

• In this corner… Is there going to be a fight?

• “Where are your clubs?”

• Am I that boring or did he have a late night?

• “If you vote this down, start packing your office!”

• You know your camera and mic are on, don’t you?

• Open the bar!

Secret Word for CE

No Other Pub

Questions?

Additional Board & Corporate Governance Information

Named Fiduciaries

• Named Fiduciary

• ESOP Trustee(s)

• Functional Fiduciary: Anyone who exercises discretionary authority and control over management or disposition of plan assets. Could include:

• Board of Directors – to extent of appointment power

• ESOP Administrative Committee

• Outside advisor – but only if s/he makes the decisions with respect to plan assets

Corporate Fiduciary Standards

Duties under applicable state laws

• Duty of Care

• Duty of Loyalty

• Court presumes Board actions were informed, made in good faith & made in honest belief they were in best interests of the company & shareholders

Business Judgment Rule

• Burden of proof upon shareholders if challenging Board actions

ERISA Fiduciary Standards

ERISA fiduciaries must act:

• Solely in the interest of plan participants and beneficiaries

• For the exclusive purpose of providing benefits to participants and beneficiaries

• With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matter would use in the conduct of an enterprise of like characters and with like aims

• In conformance with the Plan and Trust documents, as long as the documents are consistent with ERISA

*Note the Board Actions that affect the Company’s operations and assets (even in 100% ESOP – owned Company) are generally not subject to ERISA*

Evolving Ownership Engagement: Keeping Pace with Changing Times

ESOP Ed Co-Chair

Kerianne Geist

Marketing Manager

Sarah Madsen

Support Manager

ESOP Ed Co-Chair

Josh Kylander

Materials Lab Manager

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.

Evolving Ownership Engagement: Keeping Pace with Changing Times

Agenda

• Introduction of our main topic

• About Us! How did we become an ESOP?

• What have we done in the past in relation to ESOP Engagement?

• What has changed?

• What’s the path forward?

The Question for the Day!

What do you need to address to keep your efforts around ownership engagement relevant and successful? What are the challenges that we face?

A Brief History of Braun Intertec

• We are a consulting firm with a team of engineers, scientists, architects, drillers, technicians, developers, and business staff

• “Intertec” = Interrelated Technologies

A Brief History of Braun Intertec

Our people!

• 1,200+ employees

• 43 offices

• In the field, in the office, in remote offices – folks that sit at desks all day and folks that drive all day!

A Brief History of Braun Intertec

• Went from family-owned company that was established in 1957 to the beginning of an ESOP program in 1995

• Became 100% Employee-Owned in 2007

• All full-time employees are eligible

• 6-year vesting program

• We have seen consistent growth in Employees, Revenue, and Stock Price

• Growth = Organic + Acquisitions

A Brief History of Braun Intertec

• 2011 – Ownership at Work

• Included our ESOP Education Committee

• Our ESOP Engagement efforts began!

• Engage and recognize employeeowners in “Ownership Thinking”

• Events, Education, Fun!

What Braun Intertec has done!

• Education Efforts

• Educational Tips

• ESOP Essay Contest

• CEO Program

• Event Planning

• Guess the Stock Price

• Cheers

• The Brauscars

• Special Events

• Recognition

• Braunies

What’s

changed at Braun Intertec?

• Bigger footprint, more spread out than ever!

• More remote workers

• More employees and new “departments”

• New technologies

• Shifting priorities

• Looking for scalability

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.

Through flexible end-to-end lifecycle management solutions, a commitment to data security, and decades of market and product expertise we help carriers, brokers, key stakeholders, and participants pursue strategic sales opportunities and successfully navigate market change.

Andesa Overview

Life & Annuity Market

• Solutions – Policy and Plan Administration

• Delivery – Technology and Service Outsourcing

• Products – Group, Individual Life, and Annuities

Ownership

• No VC or Private Equity – 100% Privately Owned via ESOP

165 Employee-Owners

• Our People are Our Purpose

• US-Based – Covering 14 States

• Flexible Work Environment

Celebrating 40 Years

Andesa Overview - Our Journey to ESOP

2015 – 8% Employee-Owned

• One shareholder

2020 – 100% ESOP

• Founder and key stakeholders retired

• Announced January 1, 2020

• 3 months after transaction COVID

lock-down

Where People First Matters Most

In January 2020, Andesa become 100% employee-owned, demonstrating our decades-long commitment to powering exceptional client experiences by making our people our purpose

We set goals and achieve outcomes that reflect our dedication to the company as ambitious, autonomous employee-owners

We form lasting client relationships through our responsive staff, high-touch support, and fast turnaround in solving challenges big and small

We find opportunities to succeed by being proactive and forward-thinking to always create momentum towards improvement

We build on each other’s strengths, producing impressive results from individual contributions to exceed expectations from our clients

What Andesa Has Done!

BAFLE Training

• Business Acumen, Financial Literacy, ESOP

• Created by employee-owners, trained by employee-owners

• Support from Praxis

• Started with ESOP

• Part of our Continuous Quality Improvement (CQI) journey & road to open book management

Communication Committee – Re-energized

• New Team – Recruitment and Implementation

• Total Systems View

• Focus on streamlining internal communication and expanding on ESOP

• Led the first successful EO Month in October with another engagement committee

What Andesa Has Done!

Employee Ownership (EO) Month

• Led by a team of representatives from all engagement committees

• Fun and educational

• Focused on the virtual activities for inclusion

• Over 60%+ participation in the month – success for Andesa

• Areas for improvement

Engagement Overall

• Employee Appreciation Week

• Engagement Committee

What’s Changed at Andesa?

Shift From In-Person, Hybrid to “Embracing Remote”

• Business Acumen, Financial Literacy, ESOP Recruiting Talent – Now in 14 States

• New Team – Recruitment and Implementation

• Total Systems View

Targeted Communications

• Focus on more targeted communications to employees in different parts of their lifecycle – onboarding, 1st statement, retirement, etc.

• Understanding gaps

• Greater understanding and excitement

What’s Changed?

• Why do the impactful things we did then seem to have less traction now?

The Path Forward

Scan QR Code to Enter Your Answers

The Path Forward

The Path Forward

How do we know if what we’re doing is working?

The Path Forward

How do we communicate effectively? What challenges exist related to communication that can make it difficult to “spread the ESOP engagement word”?

The Path Forward

How do we address the level of effort needed to get employee-owners engaged when they are Remote Workers? And the number of Remote Workers continues to rise?

The Path Forward

How do we address the level of effort needed to get employee-owners engaged when offices are spread apart and are not equal size? Offices ranging from 2 employees to 450? Or virtually disconnected locations (warehouse, field)?

The Path Forward

How do you deal with all the existing levels of engagement?

Different offices/disciplines have different engagements based on subcultures and leadership…

The Path Forward

What efforts are we making specific to a new company acquisition? Do we have an established path to getting that new company in to the “fold” related to ESOP engagement?

The Path Forward

How do we make sure our efforts are scalable as the company continues to grow and spread out?

The Path Forward

Is ESOP Committee membership representative? Enough hands from enough “corners” of the company?

The Path Forward

How do we address turnover in relation to an engagement committee? How do you get the work done?

The Path Forward

How do we keep things “fresh” without re-creating the wheel every year?

Blue bird Secret Word

Is Your Home at Risk? How to Avoid the Pitfalls of Inadequate Fiduciary Insurance

Ted Becker Partner

Rick Pearl Partner

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.

o ERISA Overview

o Types of Insurance Coverages

o The Fiduciary Liability Policy

o Common Problem Areas

o Procuring Good Coverage

ERISA Overview

o ERISA regulates plans by imposing fiduciary obligations on those who make certain discretionary decisions

o There are 14 sections in ERISA that address

“fiduciary responsibility

” (found in 29 U.S.C. Part 4)

o e.g. the duty of prudence

o the duty of loyalty

o the duty to avoid non-exempt prohibited transactions

o co-fiduciary liability

o etc.

ERISA Overview

o ERISA § 409, entitled “Liability for breach of fiduciary duty,” states that a fiduciary who breaches “any of the responsibilities, obligations, or duties imposed upon fiduciaries

“shall be personally liable to make good to such plan any losses to the plan resulting from such breach . . .”

ERISA Overview

o ERISA also regulates plan administration

o e.g. providing documents to participants/making documents available, like plan documents, summary plan descriptions, certain contracts

o providing benefits statements

o filings with the DOL, like annual reports and certain terminal and supplementary reports

o retaining records

ERISA Overview

o ERISA also regulates the settlor functions : plan adoption, amendment, and termination

o e.g. written instrument must exist

o written funding policies

o written procedures to amend a plan

o anti-cutback rules

ERISA Overview

ERISA § 410 prohibits agreements that purport to

“relieve a fiduciary from responsibility or liability for any [fiduciary] responsibility, obligation, or duty

ERISA Overview

oThus, ERISA creates risk of liability for fiduciary breaches, plan administration errors, and errors in plan adoption, amendment, or termination

The Types of Insurance Coverages

o Some insurance protects against losses you suffer directly. First - party losses, like physical damage to business building, business property, or cars, or losses to income.

o Liability insurance is third - party insurance that protects against claims made against you.

o ERISA bondsarenotliabilityinsurance. ERISA bonds generally protect against a risk of theft of plan assets.

The Types of Insurance Coverages

o D&O insurance covers claims by shareholders, equity firms, employees, clients, customers, competitors, lenders, etc. relating to corporate governance, management, and operations

o D&O policies have ERISA exclusions

o Employment practices insurance covers claims by employees or potential employees relating to hiring, employment, and termination

o EPL policies have ERISA exclusions

The Fiduciary Liability Policy

o Fiduciary liability insurance provides third - party, claims - made coverage

o FLI protects against claims that allege some type of wrong in connection with an ERISA plan

o Responds to claims made during the policy period and reported to the insurer during the policy period (or a short time after)

o Pays for the defense of claims

The Fiduciary Liability Policy

o The precise scope of the FLI depends on particular language in the policy. The policy will define key terms that determine what the policy does, and does not, cover

o What is covered?

o FLI generally insures against “loss” of an “insured” because of a “claim” for a “wrongful act”

o Each of these quoted terms will be defined in the policy (we will discuss these more later in this presentation)

The Fiduciary Liability Policy

o Fiduciary liability insurance generally does not cover:

o Non-ERISA claims

o Claims for personal injuries or property damage

o Certain fines or penalties

o Fraudulent, criminal or intentionally dishonest acts

o Illegal profiting

o Payment of benefits due, unless as a personal liability of a fiduciary

Common Problem Areas: Defense

oFLI can provide “duty to defend” or “indemnity/pay on behalf of” defense coverage

Coverage Issue

(there are exceptions to these general points)

Reduces the policy’s limit of liability

Defense against entire claim

You get to select your lawyers

Insurer pays full rates

Privilege remains between you and attorneys

Insurer pays as defense costs are incurred

Duty to Defend Indemnity/Pay on Behalf of

Usually

Common Problem Areas: Definition of Claim

o Like the Insuring Agreement, the definition of “Claim” can impose limits on coverage

o Today’s policies usually cover DOL investigations, and some policies have a separate insuring agreement that does not include “against an insured for a wrongful act” language – this might be called a “pre-suit investigation” or something similar

o BUT – the definition of “claim” also can affect the duty to report to the insurer . . .

Common Problem Areas: Insuring Agreement

o A policy’s general coverage is set forth in the Insuring Agreement

o The Insuring Agreement can have substantive requirements or limitations that can hurt or help, depending on the situation

o E.g. Telligen, Inc. v. Atl. Specialty Ins. Co., 413 F. Supp. 3d 842 (S.D. Iowa 2019)

o FLI policy covered Claims, which included a DOL fact-finding investigation, “against an Insured for a Wrongful Act.”

o DOL issued a two-page letter notifying of investigation and onsite examination. Letter stated “The Secretary shall have the power, in order to determine whether any person has violated or is about to violate any provision of this title or any regulation or order thereunder to make an investigation, and in connection therewith to require the submission of reports, books, and records.”

Common Problem Areas: Insuring Agreement

o E.g. Telligen, Inc. v. Atl. Specialty Ins. Co., 413 F. Supp. 3d 842 (S.D. Iowa 2019)

o Did the company have a duty to report the DOL investigation?

o Court said ‘no.’ Letter was not “against an Insured for a Wrongful Act.”

o The DOL investigation was not for a breach of fiduciary responsibilities, but part of the DOL’s general investigative authority.

o NOTE: This policy language can exclude coverage for DOL investigations

o If you want DOL investigations covered, you must be sure the policy’s language would include DOL investigations in the Insuring Agreement and definitions of Claim and Wrongful Act

Common Problem Areas: Insuring Agreement

o Martin Res. Mgmt. Corp. v. Fed. Ins. Co., No. 20 -40571, 2021 WL 4269565 (5th Cir. Sept. 20, 2021)

o Institutional trustee sought indemnification from plan sponsor

o The plan sponsor sought insurance coverage from its FLI insurer for the indemnity obligation

o The Insuring Agreement covered a “Fiduciary Claim made against the Insureds for a Wrongful Act committed, attempted or allegedly committed or attempted . . .by such Insureds”

o The demand from the trustee was not a claim against the company for a wrongful act by the company, there was no allegation that the company breached ERISA – the trustee’s claim was for contractual indemnification

o NOTE: some policies cover wrongful act “against any person for whom an insured is legally responsible”

Common Problem Areas: Continuity/Retroactive Date

o A policy’s continuity date serves to cut off coverage for events prior to a certain date

o E.g. a continuity date of 1/1/2020 means that a claim relating to events 12/31/2019 might NOT be covered

o Generally speaking, you need a policy in place before an ESOP transaction – either initial transaction, second/third stage, or sale transaction

Common Problem Areas: Definition of Wrongful Act

o The definition of wrongful act specifies what type of claim the policy will cover

o Policies can vary significantly

o Does the policy cover administrative actions that might be non-fiduciary actions?

o Does the policy cover settlor functions in adopting, amending, or terminating a plan?

Common Problem Areas: Definition of Insured

o Definition of Insured can vary

o Some policies have narrower definitions that require endorsements to name specific people

o Most policies define insured by relationship to a company or plan (e.g. director, officer, employee) –what about independent contractors or others?

o Note that many policies cover “natural person” trustees, so an individual trustee can be insured

Common Problem Areas: Limits/Retentions/Deductibles

o The total limits of liability for FLI must be adequate to cover defense costs and potential settlements/judgments

o Note that many policies share FLI limits with D&O limits

o Costs of defense can be several million dollars

o Consider whether there are any potential upcoming transactions or events that might create exposure

o Many policies include separate retentions for ESOP claims by endorsement

Common Problem Areas: Changes in Control

o Liability policies have “change in control” provisions that cuts off coverage upon significant corporate events – sale of assets, stock, merger, etc.

o Upon a change in control, the policy continues, but it cuts off coverage for events after the date of the change

o This means that a new policy needs to be procured for the post-event period

o Then, a tail policy needs to be purchased for the pre-event period

Common Problem Areas: Definition of Plan

o Definition of Plan

o Note that some policies exclude ESOPs unless added by endorsement

o There has been some litigation over the proper naming of plans by endorsement, so please check your policy!

Procuring Good Coverage

o Talk to your broker, and/or get recommendations for a broker who handles ESOP insurance

o Be careful and complete in your application materials

o Take the time to review your entire policy

o Make sure all endorsements are provided (review the schedule of endorsements)

o Ensure declarations and endorsements are accurate

o Understand reporting requirements

Procuring Good Coverage

o Get quotes for excess coverage to increase limits

o Additional limits may be harder to obtain after a significant event

o Review the excess policies to ensure they ‘work’ with the primary policy – one possibles issue is with excess policies re-imposing the “against an insured for a wrongful act” requirement

o Engage coverage counsel for at least a quick review of your policy terms

Secret Word for CE

The Belfry

Renewing Ownership Passion in Mature ESOPs

Cathy

Managing Director, Workplace Development,

Ivancic,

A Blue Ridge Company

Heather Stephens, Manager of Employee Engagement Restek

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.

• Ownership passion matters

• Restek’s Story

•

Results of an audience survey

• A few more examples for inspiration

Once upon a time …

• Happy, successful ESOP company

• Great collaborative culture, tremendous rewards

• All the people knew why ESOP mattered

• Years of success and prosperity

The happy kingdom is facing some disruptions

• Looking at repurchase, haves/have nots in future

• New people, new workforce expectations

• Needing to sustain/expand ownership culture

Restek’s real life story…

Heather Stephens

Over 15 years of servant leadership experience leading teams in Human Resources and Sales & Marketing orgs

Restek: Human Resources, Manager Employee Engagement

At Restek, focused on developing & executing on strategic initiatives such as:

• Employee ownership & ESOP education

• Leadership & Talent Development

• Diversity, equity, inclusion & belonging programs

• Internal communications

110 Benner Circle, Bellefonte, PA 16823

Email: Heather.Stephens@restek.com

Restek Corporate History

Founded in 1985

Humble beginnings in 1985, Restek starts out in a single room of an elementary school–turned business incubator making Fused Silica capillary columns

today – 140,000 ft2

Restek Corporate Headquarters

Bellefonte, PA U.S.

The Restek Campus

Restek: A Global Company

Research & Manufacturing:

Global Headquarters,

Bellefonte, PA

Glastron, Vineland, NJ, U.S.

Microquartz, Munich, Germany

Sales Offices:

Global Headquarters,

Bellefonte, PA

Restek Thames (London)

Restek France (Paris)

Restek GmbH (Frankfurt)

Restek Italy (Milan)

Restek Spain (Madrid)

Restek Japan (Tokyo)

Restek China (Beijing)

Restek Differentiation – The Foundation

Focused on the Customer

Focused on Employees

100% ESOP in 2008

Plus 1 Service – free, fast, friendly service – go the extra mile

Innovation – improved workflow solutions for chromatography

Execution – quality products and services on-time

A safe, healthy and energetic working environment

Since every Restek employee is also an owner, every one of us has a vested interest in our success.

What Restek does

Focus Markets

Market-based Solutions

Restek’s Employee Ownership Story

• First elective purchases 1998-2001

1998

• 2.1% employee owned

2001

• Pool of Restek shares available because of ESOP transactions

• Match of more than 3% of pay provided from 2001-2004 – grew to 9.5% employee owned

2004

• Began exploring how to move 100% ESOP ownership

• ESOP transaction provided a pool of shares to increase to 22.3%. Match increased to 6% of pay

• From 2005-2008, Restek made contributions which released shares

2005

• Match continued to be offered at 6% of pay

2008

• Leveraged 100% ESOP transaction made a pool of shares available for decades

• Match continued to be offered at 8% of pay or more

• Over the past 14 years, Restek stock value has grown exponentially by almost 1800%

2022

Our ESOP Sustainability Journey

As our ESOP matured, about 2 years ago we began to put together a multi-faceted approach focused on:

• Developing a Financial Long-Term Strategy

Speaker photo goes here

• Strengthening our Employee Ownership Culture & Engagement

ESOP Education Series

In partnership with Workplace Development, we identified key opportunities to focus our content on:

• Education around our ESOP & how it works

Speaker photo goes here

• Ownership mindset & its importance to who we are

• Inspiration for more employee owner involvement

Our Approach to Success

• Interviewed over 40 employees & retirees to date

• Focused questions on Restek’s unique history, culture, ownership benefits, & retirement goals

Speaker photo goes here

• Tailored the structure and overall content to fit our ESOP

Maximizing Impact

• Approached roll-out like a marketing campaign

• Modules and communications introduced monthly

• Leveraged different voices to help encourage participation over the course of a year

• Trustees

• Employee Owners Communication Team

• Head Coach

• Leadership

• Culture Committee leaders

Interactivity is Key!

• Built interactive ‘clickable’ modules to encourage engagement and active participation

• Incorporated quizzes and knowledge checks for each module

• Video interviews and pictures of our employees throughout our history make it personal

Make it fun!

• Held 14 different live ESOP Game events for 350 employees on-site for all shifts for October 2022 Employee

Ownership Month

• Culminating the series at annual Owner's meeting in May in person with celebration to follow

Future Opportunities

• Continuing to offer the curriculum for every new hire

• Adapting content to include our Non-US employees as we begin to bring employee ownership type bonus structures globally

• Opportunity to use content for recruiting & employer branding, external corporate marketing and internal communications about ownership in the future

Let’s check in on the mini-survey!

We will share results during the session.

Elements that help with success

• Encourage long-time employee owners to share

• Focus on cultural and financial sustainability

• Two-way communication/ interaction

• Promote the financial and the people/cultural advantages

• Answer questions about plan rules without boring those who know the answers

Two kinds of credibility

Insider credibility Outsider credibility

Pennoni Employee Owner Education

Construction company weather day

CEO Program- you belong here

97% retention for 300 people who participated

Custom Board Game Show off your knowledge

Renewing the passion has advantages

• Retain/attract great employees

• Keep our culture strong

• Create a shared vocabulary for company communication

• Challenge new thinking

• Reduce distracting rumors

• Focus on job-level performance

• Clarify what we mean by “think like owners”

• Make the benefit a benefit

Secret Word for CE

Rhythm & Booze

Cathy Ivancic

• Provides communication, training & ownership culture services

• 30 + years strengthening ESOPs

• Written tools/ Annual Meetings/ New ESOP Rollout Services/ ESOP Committee Development/ ESOP & Business training

Managing Director, Workplace Development A

Questions for us?

Managing

Cathy Ivancic,

Director, Workplace Development, A Blue Ridge Company

Heather Stephens, Manager of Employee Engagement Restek

Seizing Transitions as Opportunities for Culture Change

Rich Cammarano President and CEO

Tech-Etch

Jon M. Sweigart

Principal Praxis Consulting Group

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.

What’s the difference?

Change

An event.

Examples:

• A founding leader departs.

• An ESOP is created.

Transition

An emotional and psychological journey, often resulting in new perspectives and identities.

Examples:

• New leadership sets direction.

• An ownership culture is developed.

Based on Transitions by William Bridges

Other Roles

Outgoing/Retiring CEO Consultative Development

Service Providers Specific tactics/to do’s Human Resources Coordination Development

Types of Succession

Opportunity #1: Leadership succession

Change

Labor Day 2016. Tech Etch

founder and CEO since 1964 abruptly departs.

Transition

Emergency succession process begins the search for new leadership.

Phases of succession

PREPARATION (FOUNDATION)

IDENTIFICATION OF SUCCESSOR

INTEGRATION

Internal vs. external

External (+)

• Alternative perspectives and approaches

External (-)

• Un-tried, no history of basis for observation

Internal (+)

• Known entity

Internal (-)

• Lack CEO experience

• C-Suite experience

• Values/ style/culture risk

• Continuity

• Challenge re: peers (executive team)

• Generate new excitement and energy

• Flight of internal leaders (who didn’t get the job)

• Deep familiarity with company

• Internal competition/ politics

• No pre existing ideas and perceptions

• Expensive to search

• Model for internal career opportunities

• Research in ESOP companies

• May not have the capacity to lead the company in a new direction

• Know about gaps

Consider external candidates when…

• Poor company performance.

• Hard decisions need to be made without old loyalties.

• No insiders ready (no planning and development?)

• Culture needs to change – many long-time employees.

• New position that requires special expertise

• Fresh perspective or energy needed

Founder succession: challenges

• Founder and company identity intertwined

• Succession surfaces differences between founder legacy and company future

• Board/founder relationship may change

• Founder’s role in transition

• Staff anxiety about stability, loyalty

Integration challenges: external

Challenges

• Knowing what they don’t know

• Understanding the culture

• Building relationships with stakeholders

Sources of help?

• Board

• Outgoing role holder

• Successor’s team

• Nuances of internal politics

• HR

• Coaching

Opportunity #2: sale to an ESOP

Change

2018. Tech Etch owners sell remaining shares to ESOP.

Tech Etch is now 100% employee-owned.

Transition

New leadership begins to define and build a sharedownership culture.

Choices: what does ESOP mean?

Initial culture formation

Values of founder and how they are demonstrated and reinforced

How the firm successfully addresses external market/competitive challenges & ‘internal integration’

(Edgar

Schein,

2017)

Initial culture formation

Values of founder and how they are demonstrated and reinforced

How the firm successfully addresses external market/competitive challenges & ‘internal integration’

(Edgar

Schein,

2017)

Culture formation

Intentional

Values you name

Expectations for behavior

Leaders’ communication

Leadership actions: consistent inconsistent

Policies & practices

Rewards & consequences

Unintentional

Experience

Observation: behavior what is acceptable symbols & stories

Interpretation

Culture formation

Primary:Leaders

• What is paid attention to, measured, controlled

• Reactions to critical incidents

• Criteria for allocating resources

• Role modeling, teaching, coaching

• Criteria for allocating rewards

• Criteria for recruiting, hiring, promoting org’l members

Secondary

• Org design & structure

• Org systems and procedures

• Org rites and rituals

• Design of physical space, facades and buildings

• Stories, legends and myths about people and events

• Formal statements of org’l values, philosophy and creed

Support for cultural change

Board of Directors

Senior leadership team

Strategic planning

Succession/leadership development

Shaping inherited teams

Assess the people you have and the dynamics at play.

Reshape team membership, sense of purpose and direction, operating model, and behaviors according to business challenges and culture you want.

Accelerate the team’s development with early, easy wins.

Building a succession system

Succession System

Continually Looking Ahead

Hiring & Developing With the Future in Mind

Leadership Development

Commit to a Culture of Leadership Development

Secret Word for CE

KC Juke House

Seizing Transitions as Opportunities for Culture Change

Rich Cammarano President and CEO

Tech-Etch

Jon M. Sweigart

Principal Praxis Consulting Group

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.

DISCLOURE

The Following Cases Are Fictional and Do Not Depict any Actual Events

CASE 1 – PEERLESS MANUFACTURING COMPANY (“PMC”)

FACTS

• PMC became ESOP 1978 – Governance includes 5 member Board elected by popular vote of 500 participants every third year; following election, new Board elects one member to serve as both Chairman and President

• Starline is the Directed Trustee for last 12 years; has not attended Board meetings until recently

• In 2022 responding to supply chain issues, President orders (A) Manufacturing Plants to make sweeping changes to timely meet customer needs (B) employees to work double shifts the busiest 3 months of year

• Order issued to meet customer needs and build ESOP value

CASE 1 – PEERLESS MANUFACTURING COMPANY (“PMC”)

• Plan accepted enthusiastically within the Warehouse Operation but met with resentment and resistance in the Production Plants

• Production Plant employees anger against President grows; demand his dismissal and threaten plant sit-out creating crises situation

• Board members are split; two votes favor the President’s order, two oppose it and support sit-out and one vote is undecided

• Several Board members ask Starline for help in resolving the problem; Starline agrees to attend upcoming Board meeting

CASE 1 – PEERLESS MANUFACTURING COMPANY (“PMC”)

DISCUSSION ISSUES

• What authority and responsibility does Starline have with the PMC governance model

• What actions should Trustee consider

• What should Trustee do if majority of Board want to replace the President

• What is the responsibility of the Board

• How should the sit-out be addressed

CASE 2 – DELUXE AVIATION SERVICES, INC. (DAS)

FACTS

• 2017- Jim Smith (President, sole Director and only shareholder), sold 100% interest in DAS to ESOP Trustee (Starline) for $45M control position and financing warrants with 25% equity dilution

• Smith wants absolute control of DAS in spite of selling 100% to the ESOP; Smith wanted to serve as President and Chair of the 2 member Board (himself and personal attorney)

• Starline disagrees insisting that a new President from outside be hired; there will be a 3 member Board including Smith, the President and an outside Director approved by Starline

CASE 2 – DELUXE AVIATION SERVICES, INC. (DAS)

• Following rigorous negotiations Starline and Smith executed documents including an Investors Rights Agreement (IRA)

• Starline agrees to be Directed Trustee as directed by the Board; 3 member Board with Smith as the Chair, Mr. Jones the Interim President (VP of Operations and close friend of Smith) and an independent director approved by Starline

• Under IRA the Trustee and Board were restricted on certain actions without Smith’s written consent (e.g. determine executive compensation, make acquisitions) until $38M of debt repaid and warrants redeemed

CASE 2 – DELUXE AVIATION SERVICES, INC. (DAS)

• Shortly after the ESOP sale, the Board interviewed 3 directors approved by Starline; all were rejected

• Smith and Jones nominate 3 candidates for the Board; Starline rejects all of them due to lack of independence or not qualified to serve on a Board

• Smith and Jones made no effort to conduct a search for a new President; when Starline proposed candidates Smith and Jones refused to interview them

CASE 2 – DELUXE AVIATION SERVICES, INC. (DAS)

DISCUSSION ISSUES

• What options are available to Starline; is there a strategy to break the deadlock

• Additional Fact: Assume Starline has learned that Smith failed to disclose prior to the transaction he was being paid and continues to receive substantial kickbacks from select service providers

• How does this additional fact impact the options for Starline

CASE 3 – CENTURY BUILDING MAERIALS, INC. (CBM)

FACTS

• 2014-Mr. Smith sold 100% interest in CBM to newly formed ESOP and Starline is appointed as Discretionary Trustee; he remained as President and Chair with annual compensation +$500K; other Board members are VP and CFO – both long tenured employees

• Starline did not attend Board meetings, receive Board minutes nor monitor activities until 2020; Board re-elected every 3 years with Starline confirming nominations without question

• Smith appoints 30 year old son David Smith as EVP and nominates him for the Board; Starline approves but noted concern

CASE 3 – CENTURY BUILDING MAERIALS, INC. (CBM)

• During the 2020 annual valuation, Starline learns that Smith was earning $850K, son David earned $425K, second son Mason Smith (age 24) was hired as a manager and earned $275K, and daughter Alice was an independent contractor to CBM earning $100K per year

• Starline contacts compensation consultant regarding Smith family compensation; consultant indicates it needs more info, but it appears the compensation paid to these family members raise a serious issue of reasonableness

• Starline is also concerned with the appearance that Smith was running CBM as a family business and not a 100% ESOP

CASE 3 – CENTURY BUILDING MAERIALS, INC.

DISCUSSION ISSUES

• Is there a basis for real concern

• What options may Starline take

• If Starline complains to management and is terminated by the Board, is there any recourse for Starline

• Does Starline in part share blame in this case; if so what exposure is there if it pursued the matter with the DOL or in Court

CASE 4 – ABLE DISTRIBUTION COMPANY, INC (ADC)

FACTS

• ADC is 100% ESOP since 2010, founders and sellers not active in Company, Starline is the Trustee with an independent Board

• ADC is a market leader in home healthcare products with 10 branches in mid-size cities in 6 states; revenue +$100M

• Company has well-established ownership culture based on a strong sense of mission and community commitment

• Merger LLC (Private Equity Firm) is doing “roll-up” in the industry through acquisitions with the goal of going public in 5 years

CASE 4 – ABLE DISTRIBUTION COMPANY, INC (ADC)

• Merger is HQ in New York with history of cost cutting and closing locations to maximize profit; if successful it would close locations and cut staff; Merger typically acquires the stock of targets.

• 2021 Mr. Smith, former VP and Board member with ADC was recruited by Merger to lead the industry roll-up; before leaving he was subject to an employment, confidentiality, and nonsolicitation agreement

• Smith is aware of recent ADC valuation for the ESOP and advised Merger to offer a 60% premium over that valuation to acquire ADC as a signature firm in the roll-up to entice other firms to sell

CASE 4 – ABLE DISTRIBUTION COMPANY, INC (ADC)

DISCUSSION ISSUES

• If ADC does not want to be acquired what actions can be taken

• Mr. Smith was an ADC insider, what exposure does he and/or Merger have

• Will it make a difference to ADC if Merger was offering to acquire assets (not stock)

• What if Trustee feels compelled to sell and the Board is against

Secret Word for CE

The Monarch Bar

THANK YOU FOR PARTICIPATING