1. 2005 INTERNATIONAL CONFERENCE Boston, Massachusetts ~ November 13-15, 2005 ESOP’S FABLES: From Happily Ever After to Sour Grapes November 15, 2005 Presented by: Carrie BrodzinskiBeazley Michael CavallaroARC Michael JacobsterJackson Lewis John SchultzMorgan Lewis

2. What is an ESOP? Tax-qualified defined contribution benefit plan required to invest primarily in the sponsoring company’s stock

3. How is an ESOP created? Company creates a trust for the benefit of employees Company or its shareholders sell stock to the trust Transaction often leveraged

4. How is an ESOP created? (cont’d) Employees are allocated shares based on pro rata compensation and, for leveraged shares, as loan is paid and shares are released from suspense account Employees receive shares or cash equivalent upon leaving the company

5. Why create an ESOP? Creates tax advantages: contribution deductible; interest payments on leveraging loan deductible; certain dividends deductible; tax deferral for participants; tax deferral for certain selling shareholders Raises capital by selling newly issued shares

6. Why create an ESOP? (cont’d) Allows owner of closely held business to sell interest Improves cash flow by contributing shares vs. cash Provides retirement benefits Creates incentive of ownership

7. How does an ESOP operate? Directed trustee ESOP committee Independent trustee Repurchase obligation Trustee’s roles and duties under ERISA

8. What are the basic risks inherent in an ESOP? Conflict of interest resulting from an ESOP’s dual purposes: retirement benefit plan and financing vehicle Lack of diversity resulting from investing solely in company’s stock: ESOPs do not guarantee benefits and they put plan assets at a greater risk than the typical diversified ERISA- regulated plan

9. What risks are associated with acquiring the stock? ESOP cannot pay more than adequate consideration-the fair market value of the stock Stock is purchased from either the company or the owner For private companies, stock is not readily traded and there are significant fiduciary issues in valuing shares Duty of prudence requires an independent valuation of the stock

10. If the ESOP owns company stock how is that stock voted, and what are the ESOP’s fiduciaries’ duties as a shareholder? How are unallocated shares voted? Support of management in tough economic times Maintenance of investment Tender offers Duty to act solely in the interest of participants conflicts with voting decisions that contemplate non financial factors:  Job security for participants  Conditions of employment

11. What is the potential liability of an ESOP fiduciary? Breach of duty of prudence: valuation issues Breach of exclusive benefit rule: Verity issues Breach of duty to diversify: maintaining investment in failing company – duty to divest Fiduciary liability insurance coverage

12. What is the potential liability of and ESOP company’s officers and directors? ESOP committee members Selling owner Public ESOP’s potential duty to disclose non public material information Directors’ and officers’ liability insurance coverage

13. What do underwriters look for when evaluating an ESOP? What was the reason for creation of the ESOP? How incestuous is the ESOP committee? Have any ESOP committee members sold stock to the ESOP? Is there an independent trustee? If there is a directed trustee, is it an insider?

14. What do underwriters look for when evaluating an ESOP? (cont’d) Was there a stock valuation by a reputable independent firm supported by such Methodology? Has there been any fluctuation in stock value? Is the company/ESOP able to meet its repurchase obligation?

15. Are unallocated shares voted by the ESOP committee a mirror of voting of allocated shares? Is the ESOP the only pension plan offered? What do underwriters look for when evaluating an ESOP? (cont’d)

16. ESOP’S FABLES Q & A