WASHINGTON - Trustees for collectively bargained employee stock ownership plans with pass-through voting provisions either have to listen to what participants want, or they need to have a pretty good reason not to, a new guidance letter issued by the Labor Department says.
While there is some disagreement over whether this has always been the Labor Department's position, all experts interviewed said this letter clarifies the department's stance on pass-through voting provisions for unallocated shares in ESOPs. And while this letter was a response to collectively bargained ESOPs, experts agree the letter applies to all ESOPs with pass-through voting provisions.
"It helps in that it gives a little more clarification," said Max Schwartz, a benefits attorney, and partner at Kramer, Levin, Naftalis, Nessen & Frankel, New York. "It's not a lot, but at least it makes clear what we might have been able to infer in the past."
In her letter, Assistant Secretary of Labor Olena Berg said trustees for this type of employee stock option plan may pass to plan participants any decisions on tender offers and/or proxy voting - as long as the participants' decision on the unallocated shares is not imprudent and complies with Titles I and IV of the Employee Retirement Income Security Act of 1974.
"This should give trustees more comfort because it gives them a road map," said Ian Lanoff, former administrator for the department's Pension and Welfare Benefit Programs, and now a partner at Bredhoff & Kaiser, Washington.
ESOPs can sometimes be a secondary means of retirement benefits, but a primary venue for employees to voice opinions on major corporate decisions, Mr. Lanoff said.
In his letter asking for guidance on pass-through voting provisions for collectively bargained ESOPs, Mr. Lanoff said the AFL-CIO is concerned about trustees who think it is their fiduciary duty to disregard participant direction when they independently analyze an issue and reach a result different from that of the participants.
Ms. Berg said in an interview that pension law has always required trustees to follow plan provisions, but also to comply with ERISA standards.
"What we said is that you can't automatically assume that following plan provisions in every case will come out with a result that is prudent under ERISA," Ms. Berg said.
In cases where trustees do not follow participants' instructions, they need to show why they followed their own course.
"Trustees now have to justify their actions, and justify them in writing," said Randy Barber, director of the Center for Economic Organizing, Washington. "The burden is on the trustee, and that's more than what we had in the past."
The letter also said trustees still need to determine whether following the participants' course would lead to an imprudent result.
What's more, when there is more than one prudent choice - in which all comply with ERISA standards - trustees must side with the participants' decision, the letter says.
While the Labor Department contends this does not change its position on pass-through voting provisions, J. Michael Keeling, president of the ESOP Association, Washington, said the Labor Department has made a complete turnaround on the issue.
Mr. Keeling cited an ongoing case in which NationsBank of Georgia N.A., acting as trustee to the Polaroid Employee Stock Equity Plan, decided to tender unallocated shares as a result of a 1989 tender offer battle between Polaroid Corp. and Shamrock Holdings Inc. The terms of the ESOP required trustees to vote unallocated shares the same way they would vote shares already allocated to participants.
"In NationsBank, (the) DOL is arguing that an ESOP trustee should not vote unallocated shares in accordance with employee instructions," Mr. Keeling said. He said the department should drop its lawsuit against NationsBank.
The Labor Department argued, and a U.S. District Court in Atlanta agreed, that NationsBank should have exercised independent judgment in deciding whether to tender the shares in the 1989 hostile takeover offer against Polaroid, even if it meant ignoring the participants' directions and leaving itself open to charges of negligence, bad faith or willful misconduct.
Ms. Berg said that in this case, NationsBank failed to conduct an adequate investigation to determine whether it was prudent to tender the shares. Currently, the District Court has granted the trustee permission to petition the 11th U.S. Circuit Court of Appeals for a hearing.
