Arizona Case Heightens ESOP Oversight Responsibilities of Company Directors

The unique ownership structure of a company owned, in whole or in part, by an employee stock ownership plan and trust (ESOP) enhances the fiduciary duties of the board of directors of a corporation. The directors are subject to (1) the traditional duties of care and loyalty under state law (which is generally a reasonable person standard and the directors are afforded the benefits of the business judgment doctrine) and (2) the duty to monitor the ESOP trustee under the Employee Retirement Income Security Act of 1974, which is generally an oversight duty subject to a prudent person standard and the directors are not afforded the benefits of the business judgment doctrine.Traditionally, the duty of care requires the directors to act in an informed and deliberate manner, ensuring that they gather relevant information and make decisions that serve the corporation’s interests. The duty of loyalty requires the directors to avoid conflicts of interest, to place the interests of the company above their own personal gains and to act in good faith, honestly and conscientiously in service of their corporate responsibilities. In the seminal Caremark decision, the Delaware Court of Chancery set forth the principles related to the duty of oversight, which is…