20 Misconceptions about Fiduciary Responsibility and Liability

1. 20 Misconceptions about Fiduciary Responsibility and Liability Ben Wells – Dinsmore & Shohl LLP – 513-977-8108 John Banasek – Prairie Capital Advisors, Inc. – 630-443-9933 Bill McIntyre – Ohio Employee Ownership Center – 330-672-3028 GUEST EXPERTS Dave McCoy – Business Valuations, Inc. – 513-522-1300 Tina Fisher – Principal Financial Group – 330-836-6220 Jeff Gelburd – Marsh USA, Inc. – 717-234-3333

2. #1 – A person NOT named as a fiduciary is NOT a fiduciary. • If a person performs fiduciary functions, the person is a fiduciary. • A fiduciary is anyone with discretionary authority or control over management and/or administration of the Plan or Plan assets or who provides investment advice for a fee.

3. #2 – Board of Directors does NOT have fiduciary responsibility for the ESOP • Board of Directors generally selects & appoints ESOP fiduciaries – that is a fiduciary decision by the Board

4. #3 – Management hires the ESOP Trustee • No – the Board of Directors usually has the responsibility to select the ESOP Trustee • Management may assist in the process, but it is a Board decision

5. #4 – An ESOP fiduciary must act solely for the benefit of the company’s employees • No – ESOP fiduciaries must act solely for the benefit of ESOP PARTICIPANTS and their beneficiaries • ESOP fiduciaries have NO duty to act for the benefit of employees

6. #5 – Management hires the ESOP independent valuation advisor • No – The ESOP independent valuation advisor is hired by the ESOP Trustee

7. #6 –The independent valuation advisor sets the price for ESOP shares of company stock • No – the independent valuation advisor is only an advisor • Independent valuation advisor is NOT a fiduciary • ESOP Trustee determines the stock price • Valuation report is a recommendation to the Trustee – it can be accepted or rejected

8. #7 – TPA (Third Party Administrator) has fiduciary responsibility to the ESOP • The TPA is a recordkeeper who does not have discretionary authority or control over the Plan or Plan assets • TPA merely assists the Plan Administrator named in the Plan • TPA is NOT a fiduciary

9. #8 – The ESOP Administrative Committee has fiduciary responsibility only if the Trustee is a directed Trustee • ESOP Administrative Committee has responsibility for: • Interpreting the Plan • Establishing policies and procedures to implement the Plan • It HAS fiduciary responsibility for the ESOP

10. #9 – A “Not For Sale” Resolution by the Board of Directors means the Company can ignore offers to purchase the Company • Regarding the ESOP, the Resolution is worthless • If followed, it may be a breach of fiduciary responsibility

11. #10 – An ESOP Trustee MUST accept any offer to purchase ESOP shares for greater than the current appraised ESOP stock price • No – several reasons why it’s NOT true: • Circumstances have changed • Value for strategic buyer is not the same as Fair Market Value for ESOP – would require a new and different appraisal • Other items may be involved in purchase other than the purchase of ESOP stock • Compare total offer to “underlying intrinsic value” of the ESOP shares

12. #11 – Pass-through voting by ESOP Participants is required on any merger or acquisition • Merger – YES • Acquisition – NO • Unless the acquisition involves a merger

13. #12 - Pass-through voting by ESOP Participants is required on a sale of ESOP stock • Sale of ESOP shares – NO, unless a merger is involved • Sale of substantially all of the Company assets - YES

14. #13 – A person with a conflict of interest in a transaction CANNOT serve as ESOP Trustee for that transaction • No – it is NOT illegal • May not be smart • May invite lawsuits • BUT it is NOT illegal

15. #14 – Trustees fulfill their fiduciary responsibility re ESOP stock price by hiring a qualified independent valuation advisor • Hiring a qualified, competent, experienced, independent ESOP valuation advisor is a good start, HOWEVER • Trustees must understand and agree with the independent valuation advisor’s: • Assumptions • Methodologies • Trustees must review the valuation report draft to identify any mistakes • Maintain a permanent record file of all reviews

16. #15 – Only MBAs/CPAs can be ESOP Trustees;NonManagement employees do NOT qualify to be Trustees • ESOP Trustee can be a committee • Someone on the committee should be able to read and understand financial statements • No requirement that everyone serving as an ESOP Trustee be a financial expert • Trustee MUST be knowledgeable of the responsibilities of being a Trustee • “Good heart & empty head” is NOT sufficient

17. #16 – “Business judgment” doctrine protects fiduciaries; therefore, they should NOT document their process • PROCESS is the key • Follow process of due diligence • Ask questions • Document everything

18. #17 – Fiduciary liability is a company liability, NOT a personal liability • Fiduciary liability IS a personal liability • Fiduciaries may have to pay any judgment against them out of their own pocket • Yes, you could lose your house

19. #18 – The Company’s indemnification clause protects fiduciaries from personal liability • Exceptions in the indemnification clause may exclude protection if the fiduciary failed to fulfill fiduciary responsibility • gross negligence and/or willful misconduct is an industry standard • If the Company is out of business, the indemnification may not be worth much

20. #19 – Either the Fidelity Bond, D&O Insurance, or Fiduciary Insurance will protect fiduciaries from personal liability • Fidelity or ERISA Bond protects the Plan, not the individual, for theft of Plan assets • Directors & Officers (D&O) Insurance contains an ERISA exclusion: • no coverage for breach of fiduciary duty involving qualified ERISA plans • Fiduciary Insurance often excludes ESOPs • Make sure: • your fiduciary insurance covers ESOPs • your D&O insurance does not contain: • a major shareholder exclusion (ESOP) • a specific ESOP exclusion

21. #20 – Fiduciaries can fulfilltheir fiduciary responsibilityby following the termsof the ESOP Plan Document • Usually Yes, but not always • ERISA overrules the Plan • If following the Plan would violate ERISA, then the fiduciary must ignore the Plan and comply with ERISA