Tuesday, April 3, 2007

Tribune pension trustees can be held accountable for investment decisions

Tribune employees have gazillions of questions but this one from one of our blog readers needs to be shared with all of you: "Given the fact that Tribune, unlike say some of the airlines, is not now in danger of bankruptcy and that the sole purpose of the sale seems to be to give the Chandler heirs more money, would pension trustees who chose to invest even 10 percent of the pension funds in the new and perhaps risky Tribune venture be subject to any sort of legal action for not acting in the best interests of those with a stake in the pension plans?"

We have had a number of questions over the weekend, such as this one, relating to the duties and obligations of pension trustees in approving or directing investment of pension funds and whether they may be held accountable for making an investment in what may be considered a risky investment in a highly leveraged company and in an industry in transition, such as the proposed deal for the Tribune Company.
In general, the answer is yes. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that establishes certain fiduciary responsibilities for those who manage private pension plans. ERISA requires that pension trustees or administrators, as fiduciaries, act prudently and carefully in making investment decisions. And they can be held accountable if they don't act in such a manner.
A more specific response to these questions is clearer today than yesterday now that the Tribune's Board of Directors has signed off on an improved offer from Zell. The company press release and FitzSimon's memo to employees has sketched out the general framework of the deal and the proposed ESOP. While critical details are still unknown, what is clear is that the Zell ESOP does not require – nor could it require – any direct investment or roll over of individual employee pension funds or 401k funds into an ESOP to finance the acquisition of the Company. Such a design option is by law discretionary. Individuals cannot be compelled to invest their own personal account funds into an ESOP. The question remains whether this will be an option that the Zell Group makes available in the future. If they do, more commentary on this will follow in this blog. For now at least, employees are not being asked (or invited) to make any upfront investment. In fact, employees holding Tribune stock indirectly in the Tribune pension plan or directly in a 401k will receive $34 per share in cash.
The Zell deal does propose that future Company (as distinct from individual) contributions to the 401k plan will be made in company stock into the ESOP. Although there is certainly a greater risk in having future Company contributions be concentrated in a privately held, leveraged company, there are mitigating factors. First, the value (or price) of the Company stock that is contributed to the ESOP will be determined annually by an independent valuation firm that will take into account the amount of leverage and the future prospects of the company and the industry. From reports we have read, the initial price of the shares in the ESOP has been set at $28 — which cannot be compared to the cash offer of $34 due to the completely different capitalization of the "new" company. The price of future shares will depend on the performance of the company. Secondly, the employee is not actually "buying" the shares since the shares are being contributed by the company, although the employees will be foregoing the cash contributions that the Tribune has previously made.

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