Voting Employer Securities

[ERISA25]

Plan and trust agreement provide that unless otherwise required by law, trustee has voting and tender rights with respect to qualifying employer securities in the plan. I see nothing in ERISA or the Code that would require a pass through vote on whether 401(k) plan should sell qualifying employer securities of a public company to an independent buyer.

Any thoughts?

I have been trying to locate a good treatise or some regulatory guidance regarding the process for voting employer securities of a public company (held in a 401(k) plan) in the context of a stock sale. It is clear that the trustee is subject to ERISA fiduciary standards in voting and tendering stock held in the plan, but I am wondering if there is a source discussing the potential securities law issues (including any procedural issues). Also, it appears to me that although not specifically required, an independent trustee is advisable if trustee is part of company management?

[QDROphile]

Passing through the vote generally allows one to avoid the questions related to voting by interested fiduciaries, but not completely.

[Peter Gulia]

Even if both a right and a duty to vote is "passed through" to each participant, beneficiary, and alternate payee, the plan's trustee or other fiduciary might need to vote shares attributable to a participant, beneficiary, or alternate payee who breaches his or her duty to vote.

About the need for a special-purpose independent fiduciary, the regularly-serving trustee should ask herself: 'How would I prove that my analysis and decisions were unaffected by my interests and were taken solely to achieve the retirement plan's exclusive purpose?'

[ESOP Guy]

Your client is going to want to get specific legal advice on some of these questions.

But as a general rule the independent trustee is more important only if the trustee is going to act as both buyer and seller.

The classic example is if the owner of the company wanted to sell his shares to the 401(k) plan and he is trustee for the 401(k) plan. He would be acting as both buyer and seller in that case. There is an obvious conflict of interest in this type of situation. In fact what I have found is when an owner sells to an ESOP and he is the trustee of the ESOP the DOL basically seems to assume the ESOP paid too much for the stock. They start with a rather hostile assumption and one has to prove otherwise.

If the plan is selling to someone with no relationship to anyone in management and the shares are traded on a market with enough volume to set a market price that is rather different in my mind. To use an obvious example if the IBM 401(k) plan sold IBM shares to someone at that day's closing price it would be hard to argue the deal wasn't for FMV.

BUT without full knowledge of all the details it is hard to say for sure.

As for voting rights I am less sure about 401(k) plans but for ESOPs the document has to spell out when one gets pass through rights and when one doesn't.