Fiduciary Duty and Valuation of Stock in a Closely-Held Company

[Guest Edward McElroy]

I have a client that maintains three separate holding companies. Each holding company operates a single business. Each separate business maintains a qualified plan. Each qualified plan holds stock in each of the three holding companies. The fiduciary is an individual shareholder in each of the three holding companies. A U.S. government agency is requiring the three holding companies to merge into a single holding company. An independent appraisal will be conducted, after which the new holding company stock will be exchanged for the current holding companies' stock.

The fiduciary will be asked to vote on the merger of the current holding companies into the surviving holding company.

While this sounds terribly confusing, I wanted to know if there were PT issues. I have already spoken to the DOL (Exemptions) and National IRS and they informally indicated that so long as an independent valuation was performed, the fiduciary could vote for the merger.

Any thoughts? Thanks. Ed

[mbozek]

Under IRC 4975©(1)(E) it is a PT for a fiduciary to deal with plan assets in his own interest or his own account. Pressumably voting the plan shares would benefit your client in his individual ownership. Your client has three options: Hire an independent fiduciary to make the decision to purchase the stock, rely on the fiduciary's judgement that this is the best deal for the plans under the circumstances of a forced merger initiated by a government agency based upon an independent appraisal of fmv and vote for the merger or abstain from voting the shares of the plans and have the merger take efect without his vote.

[Kirk Maldonado]

My recommendation would be to hire competent ERISA counsel to advise you on that matter.

Competent counsel would help you deal with the question of whether you should be of using an independent fidiuciary, and who would be a good independent fiduciary to use, should you decide to use one.