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Read a sample issue of the entire newsletter (September-October 2015).Sample Article from the November-December 2018 Issue:
ESOP Litigation Trends in Last 12 MonthsOver the last 28 years, the NCEO has been tracking ESOP and employer stock plan litigation for our annual compendium ESOP and 401(k) Plan Employer Stock Litigation Review. In the last 12 months, three trends have stood out. First, just 21 new cases were decided in the last 12 months. Four of these focused on valuation. Second, the only significant new ground for ESOPs was the addition of four more process agreements between the U.S. Department of Labor (DOL) and plan trustees. They built on the 2014 GreatBanc process agreement, adding a small number of additional issues. Finally, plaintiffs in 401(k) plan employer "stockdrop" cases had no success, with courts ruling that under the new Dudenhoeffer standards, employees had to plead plausible alternative courses of actions for trustees to take in the face of a stock price decline. That has proven to be an almost insurmountable barrier.
ESOP CasesValuation: Four cases (Acosta v. Ginsberg, Acosta v. Vinoskey, Gough v. Tennyson, and Acosta v. First Bankers Tr. Servs., Inc.) all involved valuation issues. Three led to settlements; one cut back plaintiffs' claims. None raised any new issues.
Process Agreements: New process agreements were entered into in four cases. All incorporated the GreatBanc process agreement of 2014. Acosta v. First Bankers Trust Services, Inc., Maran, Inc., et al. (Sept. 21, 2017) involved the Maran ESOP and was settled along with cases involving First Bankers as trustee of the Rembar and SJP ESOPs. In the Maran case, First Bankers Trust Services and the DOL entered into a process agreement based on the GreatBanc process agreement but adding language about evaluating prior offers, documenting why the appraiser was selected, not choosing a firm that has done prior valuation work for the company, and providing more detail on how to assess the reliability projections for the valuation. In Acosta v. Mueller et al. (Dec. 27, 2017) the process agreement with Alpha Investments adds that where outside financing was available, but seller financing was used, the fiduciary should evaluate whether the outside financing provided better terms, and, if so, why seller financing was used. In Acosta v. Bat Masonry Company (Sept. 29, 2017), the agreement with James Joyner follows the GreatBanc process agreement but stipulates less frequent vetting of the appraiser. The Acosta v. Cactus Feeders, Inc. (May 4, 2018) agreement with Lubbock National Bank is identical to the original GreatBanc agreement.
Distributions: There were three distribution cases, two of which were standard issues of failing to follow plan terms. Pfeifer v. Wawa, Inc. (Dec. 29, 2017) raised the issue of whether a company can change an existing plan to provide for account segregation for all current and former employees. That is a standard practice, but some Wawa participants believed it unfairly deprived them of the subsequent rise in stock price. The case was settled, so there is no indication of how the court might have ruled.
Indemnification: In that same Wawa case a district court ruled that a company cannot indemnify an ESOP fiduciary. That has been the position of the Ninth Circuit, but the Sixth Circuit in Pfahler v. National Latex took a different view.
Management of Assets: Three cases (Brent v. Meeker, Spires v. Schools, and Hurtado et al. v. Rainbow Disposal Co., Inc. Employee Stock Ownership Plan) revolved around the issue of how management used corporate assets in ways that allegedly hurt the company's stock price. All were settled.
S Corporation Issues: In Petersen and Petersen v. Commissioner of Revenue, a tax court agreed with the IRS that deductions for accrued payroll expenses in an S corporation ESOP company that uses accrual accounting can be claimed only in the year paid, not the year accrued, because the large majority of the deductions were for ESOP participants who, as beneficiaries of the ESOP trust, were deemed by the IRS to be related parties.
Tolling: In Preston v. Acosta, No. 17-1238, the Supreme Court refused to hear a challenge to an Eleventh Circuit decision about the timeliness of an ERISA complaint in a case involving "tolling agreements," which waive the right to request dismissal of litigation as being time-barred. Preston, the CEO and trustee of the ESOP at TPP Holdings, had entered into a series of tolling agreements in a DOL lawsuit alleging that he had caused the ESOP at the company to overpay for the purchase of his shares in 2006 and again in 2008. After Preston and the DOL failed to reach a settlement, Preston argued that any action involving those transactions would now violate ERISA's timeliness requirements. In its ruling rejecting Preston's argument and holding that ERISA's statute of repose was subject to express waiver, the Eleventh Circuit was the first to rule on the question.
Who Is a Fiduciary? The court in Acosta v. Vinoskey also ruled that, contrary to a prior ruling, Michael New, who worked for the independent trustee in the deal, Evolve Bank and Trust, was not personally responsible as a fiduciary.
401(k) Stock-Drop Cases: Plaintiffs failed in all 13 401(k) stock-drop cases decided in the last 12 months. The decisions all were based on the 2014 Dudenhoeffer standard that requires plaintiffs to show that trustees had a plausible alternative course of action that would not have harmed stock prices. Plaintiffs suggested such actions as buying a hedge fund, disclosing possible financial issues to participants, freezing or selling plan assets, and eliminating company stock as an option, but courts ruled that all of these could lead to stock price declines that would harm participants.
The cases continue a trend since Dudenhoeffer of plaintiffs not having much success in this litigation.
ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2018 has more than 500 cases, classified by topic, most with a brief description.