ESOP Advisor Hall of Fame Interview - Dan Reser

Please share with us a brief history of your Career

After graduating from Law School in 1980. I went to work for a National Bank in Dallas, Texas. I worked within their trust division. Trust divisions of large National Banks are typically broken into personal trusts (estates/investments of individual’s/family’s money), and then there's a corporate trust side that handles corporate securities administration and transactions, including stock transfer and trustee/paying agent, registrar and custodian of stock and bond issuances. On another side of the corporate trust area is the employee benefits area, which is the trusteeship of retirement plans, both qualified and non-qualified, and within that, you can be involved with 401K plans, Taft-Hartley plans and ESOPs, etc.

So, I worked on both sides of that corporate trust area involving corporate retirement plans as well as securities administration/transactions for 23 years. Merger and acquisition transactions were also commonly involved in these arenas. As it turned out, learning and understanding the marketplace for large public securities transactions, both debt and equity, as well as understanding ERISA and retirement plan law, blends well when you get involved with ESOPs since a lot of these transactions involve buying the shares of the company at a market price and then also with taking out what debt may be involved to finance those transactions.

Having worked with Security Pacific National Bank in Los Angeles (after working in Houston, Texas for about eight years for a large National Bank), they merged with Bank of America. In 1991 I moved to what was then Dai-Ichi Kangyo bank (it was the largest bank in the world at the time). I ran their trust division out of L.A. for about 10 years. They're now part of Mizuho Bank, Ltd. Then I worked with Wilmington Trust for about three years on the corporate trust side, also involved with both retirement plans and public debt and securitizations. That's my background of working with those large national banks each having its own exposure to ESOP trusteeships.

Then in 2002, I formed a new registered investment advisory company, Fiduciary Services, Inc. In this role I began working directly with ESOP transactions as an independent fiduciary and trustee. I worked on several hundred ESOP transactions since that time and accumulated about fifty-five ongoing ESOP clients across the US. In 2021 I sold the business to Sanctuary Wealth Management and their subsidiary, Fiduciary Services LLC. I am currently a senior consultant to FSLLC.

Any honors or awards you've received as a result of your work in ESOPs?

I have been a member of the ESOP Association’s Legal and Regulatory Committee for over twelve years. The committee tracks and interfaces with legislators and regulators such as the Department of Labor and IRS. It's part of the group of committees formed by the ESOP Association. I also was part of an ESOP sale transaction in 2016 that the “M&A Advisor “selected as 2016 deal of the year. This was Parrot Cellular, an ESOP-owned company sale to GameStop. I acted as the trustee previous to and during this transaction.

What individuals have most helped or influenced your career?

In the early days, Dick Buxton, one of the founders of the ESOP Association, and his partners at the time Joe Rafferty and Joe Wisniewski from Private Capital were influential with me getting started as an independent trustee and setting up through a Registered Investment Advisor format.

In addition, on the ERISA attorney side, Larry Goldberg and Karen Ng were great contributors to my growth and learning process along with many other stellar ESOP/ERISA attorneys across the country. From the investment banking side, both John Menke and Victor Alum were also a great help getting started and great people to work with through the years.

Could you share a story about your friendship with them?

Dick Buxton was one of the original Founders the ESOP Association and one of the main ESOP players at the time. He and Joe helped encourage me to split off from the large National Banks to form my own RIA for ESOP trustee purposes and besides the mentorship, we also had close personal friendships. Dick passed away about a year and a half ago, and I had the opportunity to share the personal and professional interactions Dick and his family, friends had with many other ESOP professionals.

Have any of the ESOPs been unique or different?

The Parrot Cellular/Game Stop transaction was unique. It was also a good transaction for the participants of a telecom retail firm with around 80 outlets in Northern California. Parrot Cellular had consistently higher customer rankings and profitability than other ATT direct retail stores. At the time of the sale about 400 participants split about 47 million dollars. Obviously, this was a good deal for just about everybody involved. This was also an example showing that ESOP owned companies outperform their industry competitors in service which also leads to superior financial performance. Superior performance in ESOP owned companies most often leads to outsized payments to all participants at some point down the line.

Each ESOP transaction and ESOP owned company client is unique as far as I'm concerned, and each one addresses one of many marketplaces. It is interesting to uncover each company’s own “special sauce” that helped it evolve and grow to get to the ESOP purchase transaction stage that they then try to carry forward as an ESOP-owned company.

We have maintained clients covering a good part of the country and are involved in a considerable variety of industries. Those include advertising agencies, mechanised component manufacturers, insurance agencies, national waterworks contractors, telecom companies, high-tech chip and security software/device firms, many distributors of retail products, and national agriculture produce processors. I think the variety of businesses that we work with gives us a great insight into markets and how to be successful within each, as well as what common elements lead to future success for all companies.

One client that might be particularly unique is a company that provides jury selection services to major corporations and law firms across the country. There are many service companies that are ESOPs, but this is somewhat of a unique niche.

Do you have any ESOP transaction “war stories?” Were any particularly challenging?

I think every ESOP transaction is subject to being second-guessed under ERISA fiduciary/valuation standards, so you have to have a uniform and consistent application of due diligence process and investigation into the background, financials, vendors, clients and market dynamics of the company, as well as of the individuals involved in leading the business. The challenges are many for each deal you go through within the scope of those things. Judging a company’s ability to meet earnings projections going forward is the biggest challenge. There is always the potential risk that any particular transaction could get picked out by the Department of Labor or a plaintiff's attorney with the thought that they can contest the valuation. If the company doesn't perform up to standards (or even, in some cases if it does), then the trustee can be the subject of a lawsuit, and you have to defend your process and the result that you came to.

I think the biggest challenges were when the Department of Labor or the plaintiff's lawyers did come. I went through about ten separate Department of Labor investigations over twenty years and was able to come to a conclusion and resolution to each without a final finding of fiduciary breach, and not being part of any ongoing settlement agreement. So, I’ve been fortunate in that respect. But those are the kinds of challenges; trying to meet those standards which are not exactly clear, so litigators can bring up new claims of things that they allege should be standards even though they haven't established any firm standards with final rules about how to look at ESOP evaluations.

I'm referring to the proposed rules for determining fair market value in the sale of non-public securities that the Department of Labor came up with in1988. Since that date, they have never finalized those rules. They've even expressed the desire not to have to finalize those rules, which doesn't make sense. That's their job: to set standards.

It gave them the opportunity to regulate through litigation. And so, they could pick anything they want when they look over a record and allege that things were missing or looked at incorrectly with the benefit of hindsight. This approach doesn't really give notice to the industry players as to what they're going to look for, what they're concerned about, or what should be done.

There's certainly been division and confusion within the ESOP industry over the years, with certain principal professionals saying specific independent fiduciary actions or reviews don't have to be done or are unnecessary in the course of a transaction, then later finding out through investigations and lawsuits that the expectation is that these things did need to be done or should have been avoided. So that, I think, is the biggest challenge. It's a kind of a general one. It's not necessarily a specific one for a specific transaction, but for each transaction, you have to go through.

What was your earliest ESOP transaction and how has the advisor community changed since then?

I started working with ESOP transactions when I was with the national banks in the mid 1980s. Especially in those days, each ESOP was kind of a one-off with separate plan and transaction design as well as various administration features. I was usually brought in when there were change of control matters that were going on for a particular plan.

I think it appears that today’s ESOPs are going more mainstream. I think advisor/professional organizations such as CPA firms, estate planners, investment bankers, and investment firms are referring and sourcing transactions more broadly than they did formerly. This is good for the industry, promoting new ESOP transactions and new ESOP companies.

Along with that, Congress and many state legislatures are on board with the employee ownership concept, and I don't think it's ever been a better environment to have ESOPs accepted by what we call “both sides of the political aisle.” It doesn't seem to be a partisan issue, and this seems to be leading to more favorable laws and assistance programs granted to employee-owned companies to encourage more growth.

Offsetting this as a trend is the growing environment of plaintiffs' litigation that tests many areas around transaction due diligence and even ESOP administration. That certainly is a threat to the community and continues to be a threat. It's always been devastating to those who get involved in it as there are large personal stakes at play, and many of the fiduciary players don't have endless financial resources nor insurance industry backing to take on these claims. There is also a long history of quite a few substantial national and regional banks exiting the ESOP trustee arena after being assaulted with numerous transaction claims.

How has the ESOP world changed? How does recent litigation or court decisions impact your role as an ESOP advisor?

Legislation has not been particularly groundbreaking since the S Corporation ESOP advantage was established in 1997, but there have been small, incremental changes, some of them fairly recent. Those changes have shown good promise to help promote formation of ESOP-owned companies into the future with congressional tax advantages, promotion, etc.

How has it changed over time?

The DOL, as I mentioned, refused for decades to come up with helpful regulations until they were forced to by Congress. Those regulations would define valuation and help set fiduciary standards within the ESOP arena. The DOL claims to be drafting proposed rules for review and ultimate adoption. The form of those rules could potentially cut either way, but the hope is, with some guidance and input from professionals, including the ESOP Association and others, the new standards would be fair, clear, reasonable and not financially backbreaking for companies and fiduciaries to go forward. The new ESOP transaction market could blossom if the threat of indiscriminate litigation is mitigated.

Do you have any thoughts about the future of ESOPs?

As mentioned above, I think, to the extent that the rules are clear and fair relating to the valuation of company stock (as well as setting fiduciary standards of action and review), then the future can be bright. Failing this there could be a continuing fallout and collapse of independent trustees to handle ESOPs.

I think there was an increase of 1% of the total ESOP numbers in the last reporting year based on the ERISA data but a lot of ESOP owned companies (just like a lot of other companies) go out of business or get sold in the course of a year. So, the net gain, I think, is a positive trend. The higher interest rate environment definitely seems to be constraining those owners who might otherwise have pulled the trigger by now to say they'd like to go forward with an ESOP transaction. So, I think we're kind of waiting for things to settle, waiting to be confident that rates aren't going to zoom back down, waiting to see that rates will settle into a range that people can rely on for a set period of time.

Can you share a story of how you helped a client achieve an “Aha” moment of understanding what an ESOP could do for them?

I have to start generally. Working with several hundred boards of directors in various companies, given all the transactions and ongoing administration that we've worked with and given that most companies have the ability to produce quality products/services for their clients. One of the most important things I try to help communicate is that for most companies to continue to grow revenues and earnings into the future they have to understand the intricacies of a growing sales and marketing effort on the part of their business and make sure they have people who can continue to bring new business clients and partners to the fore. This often is a key issue. Companies think it is enough that they have clients and they have great people to serve the clients. However, if you're not filling the bucket into the future and you’re not continuing to grow, that can run you into a problem with an ESOP. You have to keep the growth in place, and for most companies, that means robust and strategic sales/ marketing programs.

Hiring truly qualified and capable salespeople, as well as being able to scale and adapt to changing marketplaces with skill and great speed, can also help companies survive a market shift.

The last few years have also shown great difficulty for companies to hire and retain qualified staff. This issue appears persistent and can also prevent the ability for companies to grow into the future.

I've worked with a lot of companies that have run through the last Great Recession and other types of issues involving economic or regulatory shifts or predatory competition that may be an existential threat to an ESOP business. It's those businesses that are prepared to make hard and quick decisions that usually survive. “We want to wait this out”, may not always be the best approach. There are often things that need to be done at the company at critical junctures, and so an active board and executive management that is focused on making sure they're covering those bases is critical. That's part of what a trustee can do to help a company with board governance, and I think we've done that over the years.

What makes a successful ESOP and, as a result, allows you to enjoy working with them?

ESOPs with strong boards of directors and strong executive management (and that exhibit good leadership and never stop looking for new and better ways to grow their business) will typically thrive over those who do not. In addition, the ability of executive management to convey to employee-owners how to act like an owner (and for management to allow them to do that) often results in a company that's much more successful than a competing company which doesn't do these things. My approach has always been to provide the most assistance and responsiveness to our clients to help them meet their goals and help them keep them insulated from regulatory and fiduciary problems including litigation.

Companies are often very aware of their own market risks, but when we, as trustees, can help them understand regulatory and litigation risks as well as how good board governance is critical, then they're willing take appropriate action to avoid pitfalls. I find coming to understanding of these things with ESOP clients to be personally rewarding. The growth and success of a company that ends up 10 or 20 times the size of the one you started with is a very rewarding feeling, knowing that a good part of the value of this company stock will be going to all employee participants at the company.