United States: DOL Settlement Agreement Provides ESOP Transaction Guidance

Christopher Buch is an Associate, Gregory Brown is a Partner and Louis Joseph is Senior Counsel in the Chicago office


  • The U.S. Department of Labor (DOL) and First Bankers Trust Services Inc. (FBTS) have entered into a settlement agreement filed in U.S. District Court for the Southern District of New York, resolving a case challenging FBTS' performance as trustee in a transaction whereby a private label denim manufacturer was sold to an employee stock ownership plan (ESOP).
  • The settlement agreement entered into between the DOL and FBTS largely mirrors a process agreement that the DOL entered into with GreatBanc Trust Company (GBTC) in 2014.
  • It is important for all parties involved in an ESOP transaction to consider both the FBTS and GBTC agreements – and the differences between them – in order to understand the DOL's perspective as to the duties of ESOP trustees and their financial advisors in such transactions.

The U.S. Department of Labor (DOL) and First Bankers Trust Services Inc. (FBTS) entered into a settlement agreement filed in the U.S. District Court for the Southern District of New York on Sept. 21, 2017, resolving a case challenging FBTS' actions as trustee in a transaction whereby a private label denim manufacturer was sold to an employee stock ownership plan (ESOP).1 This settlement agreement entered into between the DOL and FBTS (the FBTS Agreement) largely mirrors a process agreement that the DOL entered into with GreatBanc Trust Company (GBTC) in 2014 (the GBTC Agreement, and together with the FBTS Agreement, the Agreements).2

Each Agreement sets forth a number of policies and procedures that the respective parties agreed to follow when serving as an ESOP trustee in a stock purchase or sale transaction. It is important to note that the Agreements do not change or amend any current laws or regulations, nor do they have the force of law. Nevertheless, all parties that may be involved in an ESOP transaction will want to consider the terms of the Agreements in order to better understand the DOL's perspective as to the duties of ESOP trustees and their financial advisors in such transactions.

This Holland & Knight alert is not intended to be a complete analysis of the Agreements, but rather to note some key areas where the Agreements differ and to provide some of our preliminary thoughts about the new FBTS Agreement. At the conclusion of this alert, we include a link to an in-depth chart that summarizes the terms and highlights the differences between the two Agreements.

Selection and Use of Valuation Advisor (VA) – General

The FBTS Agreement requires that the trustee document the steps it took, including who at the trustee took such steps, to determine that the VA received complete, accurate and current information, and to ensure that the trustee understood the advice of the VA. The GBTC Agreement required only that the trustee (without identifying the responsible individual or confirming the trustee's understanding of the VA's advice) document its bases for concluding that the VA has received complete, accurate and current information.

Selection of VA – Conflicts of Interest

To help address conflicts of interest, the FBTS Agreement provides that the trustee cannot use a VA that has previously worked for any party to the transaction other than the ESOP itself or the trustee. The FBTS Agreement states that such disqualifying work includes not only preliminary valuations for an ESOP sponsor, but also extends to work performed for a committee of employees of the ESOP sponsor (sometimes referred to as an "ESOP exploratory committee") as well. The specific addition of the committee under the FBTS Agreement makes it clear that the DOL is looking not only at entities that a VA may have provided work for, but even subsets of such entities that may have entered into separate engagement agreements with a VA.

Selection of VA – Process

When selecting a VA for a transaction, the FBTS Agreement imposes a few new requirements that the GBTC Agreement does not. First, the FBTS Agreement requires that, when selecting a VA for an engagement, the trustee must contact and keep a list of at least three references that it contacted before selecting the VA. Although the GBTC Agreement required the trustee to contact references of a VA prior to selecting them, there was no requirement of a minimum number of references a trustee had to contact.

In addition, the FBTS Agreement requires the trustee to inquire whether a VA has been subject to any regulatory proceedings or investigations related to its previous valuation work, and the outcome of such proceedings or investigations. Under the GBTC Agreement, the trustee would have to inquire only as to whether a VA had been the subject of any criminal or civil proceedings. It is not clear exactly what is meant by a VA being the "subject" of a regulatory or investigative proceedings. From an ERISA perspective, although the work of ESOP VAs is often reviewed and sometimes challenged in the course of DOL audits and proceedings, VAs are rarely, if ever, in our experience, the "subjects" of such actions.

Finally, if the trustee selects a VA from a roster of VAs that it has previously used, the FBTS Agreement states that the trustee does not need to undergo a full analysis of the VA if the previous analysis was completed within the calendar year immediately preceding the VA's selection for a specific transaction. The GBTC Agreement stated that a full analysis would not be needed if an analysis was completed within the 15-month period immediately preceding the transaction. The FBTS Agreement also provides that the new review does not need to be done if the VA had been previously approved by the trustee's vendor risk management program. This change provides a potentially longer "look-back" period for reliance on a prior review, and also allows a trustee to avoid performing the full analysis for each transaction if it has a robust vendor risk management program to vet potential VAs.

Oversight of VA – Required Analysis

This section of the FBTS Agreement sets forth three new requirements that the trustee must assure are satisfied in the VA's analysis. First, the trustee needs to assure that the valuation report (or other supplemental report prepared by the trustee) documents and describes the risks facing an ESOP sponsor that could cause its financial performance to fall materially below the projections relied upon by the VA. Second, the valuation report (or other supplemental report prepared by the trustee) must analyze and document in writing whether the terms of any loan the ESOP receives in connection with the transaction are as favorable as the terms of any loan between the ESOP sponsor and any executive of the ESOP sponsor that was made within the two years preceding the transaction. Third, the VA's report (or other supplemental report prepared by the trustee) must explain any differences between the proposed transaction valuation and the most recent valuation of the ESOP sponsor performed within the past 24 months by any valuation firm for any purpose.

The first change may not require additional work on the part of the VA because the riskiness of financial projections would already be a factor in most valuation analyses. However, the requirement that the valuation specifically identify and describe risk factors related to achievement of projected financial performance will require a presentation that is not currently found in many valuation reports.

The second change requires the trustee to review all loans between the ESOP sponsor and any of its executives, and scrutinize whether the terms of such loans are as favorable as the terms of a proposed ESOP loan. It is not entirely clear what the purpose of this analysis might be, or what the trustee is to do with a finding that such loans have occurred. As a practical matter, however, this requirement may be of little consequence, as ESOP loans are typically structured with an interest rate that is tied to the Applicable Federal Rate (AFR), and, for tax reasons, it is fairly unlikely than an ESOP sponsor would make a loan to one of its executives at a rate that is lower than the AFR.

The third change, requiring a reconciliation of the ESOP transaction valuation to any valuation performed within the preceding 24 months, while facially reasonable, has the potential to create a significant diversion of attention and resources from the actual transaction under consideration. Valuations are performed for different purposes and based on different premises of value; different blocks or classes of stock may be involved; companies and markets may significantly change; detailed backup for the prior valuator's work may not be available; and, ultimately, valuator's opinions may simply differ. If the FBTS Agreement is construed to require the VA to prepare and document a comprehensive analysis, reconstruction and, perhaps, rebuttal of the prior valuator's work, the potential for significant additional cost and delay becomes considerable.

Financial Statements

Both Agreements allow the trustee to approve a transaction with unaudited or qualified financial statements. However, under the FBTS Agreement, if the trustee decides to approve a transaction with such financial statements, the stock purchase agreement for the transaction must contain a provision requiring the selling shareholders who are officers, managers, or members of the board of directors of the ESOP sponsor to compensate the ESOP for any losses or harms caused by – or related to – financial statements that did not accurately reflect the financial condition of the ESOP sponsor.

While selling shareholders who are officers or directors of an ESOP sponsor often do represent and warrant in a stock purchase agreement to the accuracy of an ESOP sponsor's financial statements, the FBTS mandates such language in an ESOP stock purchase agreement. These mandated terms may have a significant impact on the selling shareholders' indemnification obligation. Although specific terms may vary from agreement to agreement, virtually all indemnification agreements have a maximum cap on the amount of the selling shareholders' potential liability, a minimum loss that must be incurred before liability attaches and a specified period of time during which an indemnification claim can be made. The FBTS Agreement, on its face, does not address any of these standard market terms. This change may lead selling shareholders who are managers, officers or members of the board of ESOP sponsors to insist that significant representation and warranty insurance coverage be in place before moving ahead with such a sale transaction.

Fiduciary Review Process – General

The FBTS Agreement contains several provisions regarding the fiduciary review process not present in the GBTC Agreement. Under the FBTS Agreement, if the trustee believes that the financial projections provided by the sellers are unreasonable, it must either:

  • ask the VA to "account for" the unreasonable projections,
  • ask management for new and reasonable projections, or
  • reject the transaction and then document the bases for its decision.

It is not clear what is meant by having the VA "account for" the unreasonable projections. If this simply means that the VA is to base its valuation on projections that it has adjusted so as to be "reasonable," this is not a particularly concerning proposition.

The FBTS Agreement also adds a new list of specific information items that a VA must obtain from an ESOP sponsor or the purchasing or selling shareholders:

  • any prior attempts by the purchasing or selling shareholder to purchase or sell the stock within the preceding two years
  • any prior defaults within the past five years by the ESOP sponsor under any lending or financing agreement
  • any management letters provided to the ESOP sponsor by its accountants within the past five years
  • any information related to a valuation of the ESOP sponsor provided to the IRS within the past five years.

As to the first item above, it will apparently be left to the parties to decide what constitutes an "attempt" to sell one's stock, as an "attempt" could range from an informal "would you be interested" to a formal offer to purchase or letter of intent, as well as a broad spectrum of steps in between. The request for "any information" related to a valuation provided to the IRS is similarly open-ended. To meet this standard, is the VA required to demand copies of shareholders' income, estate or gift tax returns? Assuming that such shareholders are willing to disclose their personal tax information, is it sufficient for purposes of the FBTS Agreement for the selling shareholders to simply advise that they have taken the position for tax purposes that their shares of the ESOP sponsor's stock were, as of a certain date, worth a certain sum of money?

Fiduciary Review Process – Documentation of Valuation Analysis

There is no difference between the two Agreements regarding these very extensive documentation requirements.

Fiduciary Review Process – Reliance on Valuation Report

There are three areas of change in this section of the FBTS Agreement from the parallel section of the GBTC Agreement. The first is a global change of references to individuals involved in the transaction process from trustee "personnel" to "employees." The import of this change is not entirely clear. Perhaps the thought is that "personnel" might include a broader class of individuals such as outside advisors, consultants, legal counsel or employees of a corporate parent or affiliate. If so, limiting the individuals subject to the requirements of this section to employees of the trustee is a positive change.

On the other hand, the FBTS Agreement expands the scope of persons whose transaction-related activities must be documented from just "those primarily responsible for the proposed transaction" to include "any employee who participated in decisions on whether to proceed with the transaction or the price of the transaction." This expansion potentially brings into the scope of the FBTS Agreement's requirements a class of employees who had no actual decision-making authority, but nevertheless "participated" in the decision-making process, including analysts, in-house counsel and others who might have provided input or expertise regarding a discrete technical, business or valuation issue.

Finally, the FBTS Agreement provides that, if the employees who were primarily responsible for the transaction, including any employee who participated in decisions on whether to proceed with the transaction or the price of the transaction, believe that the valuation report's conclusions are not consistent with the data and analysis presented, or that the report is not internally consistent in material respects, the trustee will not proceed with the transaction. As written, this section could be interpreted to require unanimity among not only the trustee's decision-makers, but also any other trustee employee who "participated" in the decision-making process, in order for a transaction to proceed.

Preservation of Documents

While both Agreements require a record of the yes or no votes of any person concerning a transaction, as well as signed certifications and contact information for those individuals making decisions on a transaction, the GBTC Agreement requires only that information on the trustee's fiduciary committee to be kept. The FBTS Agreement, continuing the theme of the prior sections, requires that this information be maintained for each employee who was primarily responsible for the transaction as well as each employee who participated in decisions whether to proceed with the transaction or the price of the transaction, and it further adds any other trustee employee who made any material decision in connection with the transaction.


The FBTS Agreement contains a section dealing with the issue of control of the ESOP sponsor that was not in the GBTC Agreement. The FBTS Agreement provides that if an ESOP cedes any degree of control to which it would otherwise be entitled based upon the ownership interest acquired, the trustee must document any consideration it received in consideration for such limitation, and why it is fair to the ESOP. In addition, the FBTS Agreement provides that if the trustee approves a transaction in which an ESOP pays a control premium, the trustee must document why it believes the ESOP is obtaining voting control and identify any limitation on such control as well as the consideration the ESOP receives in exchange for such limitation.

Not Entirety of Obligations

While the GBTC Agreement stated that such agreement was not intended to specify all of the trustee's obligations as an ERISA fiduciary and that such agreement did not supersede any of the trustee's obligations under ERISA, the FBTS Agreement was silent with respect to this issue. Presumably, this is because this clause was moved to the body of Consent Order pursuant to which the FBTS Agreement was adopted.


Although the Agreements address a wide variety of substantive and procedural issues, they do not, and do not purport to, address all of the various contentions that the DOL has raised in its ESOP litigation, nor the wide variety of issues that may arise during the course of a trustee's consideration of an ESOP transaction. As such, the Agreements represent a useful starting point, but not a complete roadmap to the successful negotiation and documentation of an ESOP transaction. Please visit Holland & Knight's website for an in-depth chart that summarizes the terms and highlights the differences between the two Agreements. 


1 Acosta v. First Bankers Tr. Servs., Inc., S.D.N.Y., No. 1:12-cv-08648-GBD, consent order and judgment, Sept. 21, 2017

2 Perez v. GreatBanc Tr. Co., C.D. Cal, No. 5:12-cv-01648-R-DTB, consent order and judgment, June 2, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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