The Employee Ownership Update
July 5, 2017
10th Circuit Shifts Burden of Proof to Plaintiff in ESOP Fiduciary CaseIn Pioneer Ctrs. Holding Co. Emp. Stock Ownership Plan & Tr. v. Alerus Fin., N.A., No. 15-1227 (10th Cir. June 5, 2017), the 10th Circuit Court of Appeals refused to overturn a federal district court ruling that Alerus Financial had not violated its fiduciary duty by not agreeing to an ESOP transaction at a Land Rover car dealership that would have increased the plan's ownership from 37.5% to 100%. The company was ultimately sold for a higher price to another buyer. Alerus decided not to approve the ESOP purchase because Land Rover told the company that "requirements for ownership/operation of its dealerships would foreclose such an arrangement." Land Rover, which had objected to the previous failure to inform it of the ESOP's partial ownership but eventually approved the ESOP's 37.5% ownership stake, explained that the "identity, reputation, financial resources, personal and business qualifications and experience, and the marketing philosophy of the designated owners and management of [Pioneer] are of vital significance" to Land Rover.
The ESOP sued Alerus for not proceeding, contending state law could force Land Rover to approve the sale. The district court granted summary judgment for the defendant, stating that no matter who had the burden of proof, the plaintiffs had not established a loss in the first place: it was speculative to say Land Rover would have approved the transaction, and the court was not persuaded by assertions that Land Rover would have approved or have been compelled to approve the transaction under state law. Significantly, the appeals court, in a split decision, went one step further and held that the plaintiff has the burden of proof in an ERISA breach of fiduciary duty claim. With this ruling, the Tenth Circuit joined the Sixth, Ninth, and Eleventh Circuit courts, but split with the Fourth, Fifth, and Eighth Circuits, which all hold that in some circumstances the burden of proof for some issues shifts to the defendant. Such splits ultimately can only resolved by the Supreme Court, and this case may be appealed. A "burden-shifting" precedent, such as was rejected in this case, would make it easier for plaintiffs to prevail.
ESOPs and Preferred-Status CertificationThe NCEO has now released the third part of its three-part series on preferred-status certifications, such as minority-, women-, and veteran-owned businesses. Companies that have one of these statuses often face insurmountable obstacles if they seek to become ESOP-owned, regardless of the demographics of the potential owners. The conflict between the legal requirements for ESOPs and typical standards to qualify for one of these preferred-status certifications makes it extremely difficult for the owner of a certified business to sell her or his company: the economy-wide crisis in business ownership is exacerbated for companies with certifications.
With support from the W.K. Kellogg Foundation, the NCEO has released detailed report, available at www.nceo.org/r/preferred. A print-ready PDF is available on that page or directly here.
The report describes the conflict between ESOPs and certification standards, provides case studies of companies, and makes recommendations both to companies and to certifying agencies. The report also links to an online database of the various certifications, broken down by state and type.