What is Due Diligence in Employee Ownership Transactions?

As leadership teams explore succession plans and various employee-ownership structures, they’ll soon encounter due diligence requirements. 

What does “due diligence” mean in Employee Stock Ownership Plans (ESOPs)?

‍Due diligence is the process of investigating potential problems that could make an ESOP transaction difficult or inadvisable. Generally, the buying party – such as the ESOP trustee – requires due diligence to uncover any issues with the company whose stock is being acquired. 

Examples of what due diligence might discover include (but are not limited to):

• Unclear titles to property
• Undisclosed liens on assets
• Bylaws that prohibit certain types of sales
• Environmental liabilities
• Improper accounting methods
• Failure to conduct a thorough business analysis of a proposed transaction.

Now that the basic definition of due diligence in ESOP transactions is clear, we’ll explore some frequently asked questions about this process. 

‍What Alternatives are There to Doing ESOP Due Diligence?

The alternative to due diligence is to simply do nothing and accept the risk. In practice, this is often what happens. 

While there have been relatively few problems to date, the risk is real. A major ESOP lawsuit – Reich v. Valley National Bank, known as the “Kroy” case – centered on this issue. Fiduciary responsibilities were breached and the court ruled that the trustee was liable for losses.

Another approach is for the seller to warranty that there are “no problems,” which shifts some of the potential liability to the seller (e.g., the employer company and its board). Still, the trustee could be sued for not pursuing proper due diligence and failing to act in the best interest of the employee-owners. 

What Areas Does Due Diligence Cover?

Due diligence is an important step in the sale of a company to its employees. A due diligence checklist in employee ownership transactions typically includes:

• Reviewing accounting practices
• Examining corporate bylaws and governing documents
• Assessing applicable laws and regulations
• Evaluating the status of company assets
• Investigating pending litigation or regulatory issues
• Reviewing general business practices and financial condition

How Aegis Trust Company Supports ESOP Due Diligence

Aegis Trust Company provides professional guidance for ESOP trustees, company boards, and management teams throughout the employee ownership transaction. Our deep expertise ensures thorough due diligence, minimizing risks and helping fiduciaries meet their obligations. 

We provide: 

Independent Third-Party Perspective

Even though it’s not a legal requirement, to avoid conflicts of interest, it is recommended that trustees be independent of the company. 

Deep Knowledge of the Department of Labor Standards

Our experienced team of professionals follows a proven, rigorous internal process that surpasses our competitors. Our processes far exceed the Department of Labor's standards, ensuring that we can thoroughly fulfill our fiduciary duties to employees.

Qualified to Handle ESOP Transactional Trustee Responsibilities

ESOP transactions are highly detailed and complex; therefore, it’s important to have a qualified partner to handle every detail. Our ESOP transaction trustee services have been extended to hundreds of companies across a wide range of industries.

By offering structured processes, regulatory oversight, and detailed financial and legal reviews, we help facilitate smooth, compliant employee ownership transitions.

Partner with Aegis Trust Company for Confident Employee Ownership Transactions

An ESOP transaction is a pivotal moment in a company’s history and can cement its legacy for generations to come. That’s why it’s important to partner with a company that can fulfill all fiduciary obligations and minimize potential legal risks to the company's stability. 

Choose Aegis Trust Company as your ESOP transaction trustee, and we’ll walk you through every step of the way – including a thorough due diligence process.