Employee Stock Ownership Plans


The company will create a trust fund for their workforce and will then contribute monies or stock to the plan and the plan can also be used to borrow money in order to purchase shares.

Should the company elect to use the plan to borrow money; the company will pay back the loan by make contributions to the plan.

The dual capacity of these plans benefits not only the employees directly by provided retirement benefits or company stock ownership but the benefits the corporation by providing a means of financing.

ESOP Regulation

The Employee Retirement Income Security Act (ERISA) is federal law that regulates investment plans in the private industry by setting minimum standard in order to qualify as an ESOP.

Additionally another means of regulation is accomplished through the Internal Revenue Code that provides annual limits that will impact tax benefits.

In order to qualify as an ESOP, it is not necessary that the plan meet both requirements set out in ERISA and the Internal Revenue Code. However an ESOP is most beneficial if it can comply with both regulatory agencies.


Employees shares are disbursed into their individual accounts however before an employee is entitled to their shares vesting needs to occur.

In other words before the employee who was allocated stock through an ESOP, that employee must have worked a certain amount of time before acquiring a non-forfeitable interest in the stock. Each company sets its own plan hence the vesting period may vary.

Distributions from ESOP

The reason for termination of employment could be significant in the distribution of their vested benefits. Hence employees do not pay tax contributions until they leave or retire. Upon retirement generally employees have the option of rolling over the interest into 401(k) and avoid being taxed. Alternatively the company or the ESOP buys back their shares at current fair market value.

Voting rights

As a matter of law when dealing with a private company ESOP participants must be allowed to their allocated shares regarding major issues that are essentially determined by the board of directors. Whereas a public company the employees are allowed to vote on all issues.

Owner of Company & Trustee

In general the ESOP Trustee(s) has the authority and discretion over the ESOP assets, acting as the legal Shareholder of the plan. The trustee is considered an ERISA fiduciary and is expected to comply with these federal fiduciary duties.

  • Exclusive Benefit Rule – An ERISA fiduciary must act solely in the interest of the plan’s participants and beneficiaries while defraying reasonable plan expenses.
  • The Prudent Person Standard – An ERISA fiduciary must act with the care, skill, prudence, and diligence under the circumstances that a prudent man acting in a similar capacity…
  • Follow the Plan Documents – A fiduciary must act in accordance with the plan documents.
  • Special Exemption under ERISA
    • Diversification – An ERISA fiduciary must diversify the investments of the plan unless it is clearly prudent not to, knowing that by definition an ESOP is “designed to invest primarily in qualifying employer securities” and keep in mind that courts tend to give the presumption of prudence for company stock in ESOP’s.

Conflicts and Fraud

If the trustee fails to comply with federal fiduciary duties then depending on the severity of the issue the matter will either be addressed by the board or litigation may be the more appropriate approach.

Case Briefs

Solis v. Webb, 931 F. Supp. 2d 936 (N.D. Cal. 2012)
Hilda SOLIS, Secretary of the United States Department of Labor, Plaintiff,
Dennis WEBB, et al., Defendants.
No. C–12–2055 EMC.
Sept. 26, 2012.


Background: Secretary of Labor brought action against fiduciaries and trustees of an employee stock ownership plan (ESOP), alleging violations of Employee Retirement Income Security Act (ERISA) in permitting the ESOP to purchase stock for more than the stock’s fair market value. Defendants moved to dismiss.

Holdings: The District Court, Edward M. Chen, J., held that:

  1. allegations were sufficient to state a claim under ERISA that fiduciaries breached their duties;
  2. allegations were sufficient to state claim for paying more than adequate consideration for stock;
  3. allegations were sufficient to plead trustees participated knowingly in act that breached ERISA fiduciary duty;
  4. that trustees appointed investment manager did not preclude trustees from being subject to fiduciary liability;
  5. allegations were sufficient to plead trustees’ conduct was knowing; and
  6. joinder of ESOP as a party was warranted.


Case Basics
Docket No.
Petitioner Fifth Third Bancorp, et al.
Respondent John Dudenhoeffer, et al.

Facts of the Case
John Dudenhoeffer and Alireza Partivopanah are former employees of Fifth Third Bank and are participants in the Fifth Third Bancorp Master Profit Sharing Plan (the Plan), which is a defined contribution retirement fund for employees with Fifth Third as a trustee. Participants make voluntary contributions to the Plan from their salaries and direct the Plan to purchase stocks for their individual accounts from options they select. During the time period in question, a large amount of the Plan’s assets were invested in Fifth Third stock. Also during this period, Fifth Third switched from being a conservative lender to a subprime lender and the portfolio became increasingly vulnerable to risk, which it failed to disclose. The price of the stock declined drastically and caused the Plan to lose tens of millions of dollars. The respondents sued Fifth Third and argued that Fifth Third violated the Employee Retirement Income Security Act (ERISA) by continuing to invest in the stock despite its decline, which was a breach of fiduciary duty. The federal district court held that the plaintiffs failed to state a claim for which relief could be granted and granted the defendants’ motion to dismiss. The U.S. Court of Appeals for the Sixth Circuit reversed and held that the plaintiffs plausibly stated a claim with the requisite causal connection.


Did the U.S. Court of Appeals for the Sixth Circuit err by holding that the respondents were not required to plausibly allege that Fifth Third abused its discretion by remaining invested in the employer stock in order to overcome the presumption that the decision to invest in the stock was reasonable?

Fifth Third Bancorp v. Dudenhoeffer – Oral Argument
FIFTH THIRD BANCORP v. DUDENHOEFFER, The Oyez Project at IIT Chicago-Kent College of Law,http://www.oyez.org/cases/2010-2019/2013/2013_12_751#argument (last visited May 20, 2014).