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Read a sample issue of the entire newsletter (September-October 2015).Sample Article from the November-December 2017 Issue:
NCEO Litigation Review Finds No Increase in Number of LawsuitsIt has become a common perception in the past couple of years that ESOPs in private companies have been targeted for more litigation than in the past, both by private parties and the Department of Labor. Results from the NCEO's annual ESOP and 401(k) Plan Employer Stock Litigation Review suggest the perception is incorrect.
In the 12-month period covered by the update (July 1, 2016, through July 1, 2017), there were 15 new lawsuits concerning ESOPs in privately held companies that reached the courts. Five of these focused on valuations, arguably the most controversial issue in ESOP litigation. The rest were spread across a range of issues, including indemnification, claims against providers, management of assets, and determining who is a fiduciary. The Department of Labor initiated four of these lawsuits.
This pattern does not represent a significant change from prior years. Since 1995, the first year covered by the NCEO review, there have been 284 cases that have reached court concerning private company ESOPs, 38 of which have focused on valuation. Since 2013, the DOL has initiated between four and eight lawsuits per year, with 2016 the most active. Most of the settlements and judgments in ESOP cases have been for under $5 million.
These data suggest that the perception that there is a wave of litigation against ESOPs in private companies is misleading. Historically, there have always been periods when a particularly aggressive litigation firm has decided to pursue ESOPs, resulting in a few additional cases that year. Because some of these have been high profile cases, it can appear that there is a dramatic change in the pattern, but the data do not support that.
There has been a great deal of litigation in public companies with employer stock in ESOPs or, more commonly, in 401(k) plans. Since the Supreme Court's 2014 decision in Fifth Third v. Dudenhoeffer challenges to plan fiduciaries in public companies have almost universally failed the decision's requirement that plaintiffs show a plausible alternative course of action that fiduciaries could have taken that would not have done more harm than good to the stock price.
Key Valuation DecisionsIn Fish v. GreatBanc Trust Company, No. 09 C-1668, a district court ruled in favor of the defendants, which included GreatBanc and members of the Antioch Company board and family who previously owned stock outside of the ESOP. Antioch became a 100% ESOP in 2003, but, after spectacular growth, experienced a downturn and went bankrupt. The 131-page ruling dismissed all claims, saying that the process the company used met fiduciary standards and that the valuation was reasonable given the thoroughness and independence of the process.
In Perez v. First Bankers Tr. Servs., Inc., No. 1:12-cv-08648-GBD, a district court said it was not enough that the trustee hired a qualified appraiser and relied on its report, but the court also said that the DOL needed to show that the facts of the appraisal process demonstrated a lack of good faith. The case is still underway.
In a different First Bankers case, Perez v. First Bankers Tr. Servs., Inc., No. 3:12-cv-04450 (D.N.J., March 17, 2017), a district court ordered First Bankers Trust Services (FBTS) to pay almost $9.5 million to plaintiffs for allowing the ESOP to overpay for the shares. The case revolved mostly around the reliability of company projections.
In Brundle v. Wilmington Tr. N.A., a district court ruled Wilmington Trust must pay $29.8 million to a terminated ESOP, saying Wilmington accepted a substantially inflated valuation, failed to assess a valuation done a year before for valuing stock options that showed the company worth $100 million less, accepted financial projections without adequate vetting, improperly accepted a 10% control premium for the ESOP when it did not have effective control of the company, and failed to investigate management's reasons for setting up the ESOP. Plaintiffs had asked for a $100 million judgment.
Other Key DecisionsIn Allen v. GreatBanc Trust Co., the Seventh Circuit agreed with the lower court that the Dudenhoeffer doctrine required a pleading of plausible alternatives in closely held companies. Those arguments were not made here, but the court ruled that plaintiffs could continue their case on the basis that the valuation was improper.
In Pioneer Ctrs. Holding Co. Emp. Stock Ownership Plan & Tr. v. Alerus Fin., an appeals court refused to overturn a lower court ruling that Alerus Financial violated its fiduciary duty by not agreeing to an ESOP at a Land Rover car dealership. What was notable here was that the court shifted the burden of proof to the plaintiffs over a fiduciary violation, an issue that has split the circuits.
In Hugler v. Vinoskey, a district court ruled that an employee of an independent ESOP trustee could be sued as a fiduciary individually because he made decisions independently. The decision is the first of its kind in ESOP law.
In public company cases, in all eight of the stock drop cases that were decided, the courts sided with defendants, saying the plaintiffs had failed to plead a plausible alternative course of action.