Employee Ownership Legal Digest
Corey Rosen (23)

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NCEO founder and senior staff member

Corey Rosen

November 21, 2018

Sonnax Case Settled

In Acosta v. First Bankers Tr. Servs., Inc., (No. 5:16-cv-00328-gwc) (D.-Vt, proposed consent judgment, April 27, 2018) the DOL and First Bankers Trust settled a lawsuit alleging that the ESOP at Sonnax Industries overpaid for its shares. The ESOP had purchased the shares for $48.8 million in 2011. The DOL alleged the value was inflated because of overly aggressive assumptions about future growth. Sonnax agreed to pay ESOP participants back $2 million, two executives will pay $200,000 in civil penalties, and First Bankers $25,000 in penalties. Sonnax was sold to Berkshire Hathaway in April contingent on the settlement for $65 million, a 35% increase over the 2011 valuation. Employees overwhelmingly voted for the transaction.

Corey Rosen

November 21, 2018

401(k) Employer Stock Challenge Loses

Continuing the string of losses in challenges to employer stock in 401(k) plans, in Fentress v. Exxon Mobil Corp., No. 4:16-cv-03484, (S.D. Tex., March 30, 2018, order granting defendants’ motion to dismiss), a district court rejected plaintiff claims that Exxon Mobil 401(k) fiduciaries knew or should have known that the price of the stock was inflated. The court ruled the plaintiffs did not allege a plausible alternative course of action.

Corey Rosen

November 21, 2018

Judge Trims Back DOL Claims on Valuation, Personal Liability of Trustee in ESOP Case

In Acosta v. Vinoskey, No. 6:16-cv-00062-NKMRSB, (W.D. Va., April 17, 2018, order on summary judgment motions 4/17/18), a federal court allowed a case against the ESOP at Sentry Equipment Corporation to proceed, but only after sharply cutting back on some of the DOL’s claims. First, the judge rejected the claim that Michael New, who worked for the independent trustee in the deal, Evolve Bank and Trust, could be held personally responsible as a fiduciary. That would have been the first time in ESOP law that an individual acting on behalf of an institutional trustee was considered potentially liable.

Corey Rosen

November 21, 2018

DOL settles lawsuit relating to Cactus Feeders ESOP transaction

In Acosta v. Cactus Feeders, Inc., et al., 2:16-cv-00049-J-BR (N.D., Tex., May 4, 2018), the insurers for Cactus Feeders, certain of its present and former directors, officers and members of its ESOP Committee, and Lubbock National Bank (the ESOP trustee) agreed to pay $5.4 million into the Cactus Feeders ESOP to settle a lawsuit initiated by the DOL alleging that the appraisal for a transaction that increased the ESOP’s ownership of Cactus Feeders from 30% to 100% did not adequately adjust for the alleged dilutive impact of warrants and stock options, did not apply a discount for lack of marketability, and did not include a discount for lack of control. The defendants agreed to the settlement, but with no admission of liability. The transaction was for $100 million, so the settlement amounted to 5.4% of the total, mostly to be added to the ESOP trust. As part of the settlement, Lubbock National Bank agreed to adopt the same process agreement that the DOL and GreatBanc Trust Company entered into in 2014.

Corey Rosen

November 21, 2018

Epic Systems Supreme Court Case May Impact Arbitration in ESOP Companies

In an online article “The Potential Impact of the Supreme Court’s Epic Systems Decision on ESOPs,” Chelsea Ashbrook McCarthy, Louis Joseph, and Jessica Farmer of Holland & Knight note that the Court’s analysis in the case indicates that it “would likely reject an argument that an arbitration provision with a class action waiver in an employee stock ownership plan (ESOP) is fundamentally unenforceable under ERISA.” The Epic case did not deal with an ESOP company (although Epic, one of several companies involved, does say that it offers all employees stock) but more broadly employers’ rights to enforce arbitration causes. Arbitration clauses are not common in ESOPs, however, and questions remain about whether they could still be challenged given the specifics of how ESOPs work. Read more at https://tinyurl.com/ ESOParbitration.

Corey Rosen

November 21, 2018

ERISA Supersedes State Tax Law

In Matters of Patrick Murphy & Kathleen Murphy, DTA No. 825277 (N.Y.S. Tax App. Trib., Mar. 6, 2018), the New York State Tax Tribunal ruled that ERISA supersedes state tax law claims against what appears to be a sham ESOP. JJF Realty was 99% owned by an ESOP and 1% by the Triune Foundation. Mr. Murphy was the president of Triune and the sole trustee of the JJF ESOP. Murphy and his wife were the only ESOP participants. The company was a limited liability partnership taxed as an S corporation. In 2006, the partnership sold property for a $2.2 million gain. The state alleged that the amount was subject to capital gains tax; the Murphy’s argued that the JJF was not taxable as an ESOP. The state contended that the ESOP was not legitimate. On appeal, the State Tax Tribunal ruled that ERISA preempts state law on these matters. It is not clear from the case why the IRS allowed the JJF plan to continue, as it appears to be a clear violation of the anti-abuse rules for S ESOPs.

Corey Rosen

November 21, 2018

DOL, Court Argue for Limits on ESOP Fiduciary Indemnification

In Pfeifer v. Wawa, Inc., No. 2:16-cv-00497- PD (E.D. Pa., motion for settlement approval filed 12/29/17), a case we reported on previously, the Department of Labor argued, and the court agreed, 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 LatexProducts said that indemnification was allowed within certain limits. The Wawa case does not set any precedents, and was settled before a trial was concluded, but if it does hold more broadly, it reinforces the need for companies to have adequate fiduciary insurance to pay for defense and settlement costs.

Corey Rosen

November 21, 2018

SEC Increases Limit on Rule 701 Exemption

On July 4, the SEC adopted new rules to increase the amount companies can offer in stock to employees without meeting reporting requirements applicable to public companies from $5 million to $10 million. The change is pursuant to legislation passed last year.

Corey Rosen

November 21, 2018

Stock is Not Money Under Railroad Retirement Act

In Wis. Cent. Ltd. v. United States, U.S., No. 17-530, (U.S. June 17, 2018) the Supreme Court ruled that stock options paid to railroad employees are not taxable as “money” under the terms of Railroad Retirement Act. Wisconsin Central had paid taxes on the options, then decided it should not have because the Act states that only “money” received by employees is taxable. The court remanded the case on a 5-4 vote. The case involved only the specifics of the Railroad Retirement Act rules. Rules for the taxation of stock options in general are very specific in stating how they need to be taxed.

Corey Rosen

November 21, 2018

Chicago Bridge and Iron 401(k) Stock-Drop Case Dismissed

In Kinra v. Chicago Bridge & Iron, 17 CV-4251 (S.D.N.Y., May 24, 2018), the Second District Court for New York continued its pattern of denying stock-drop claims in public company 401(k) plans. Plaintiffs alleged fiduciaries knew or should have known that the stock was likely to fall following a troubled acquisition, but the court ruled that a) the plaintiffs failed to allege sufficient facts that the fiduciaries should have known the stock would fall and b) failed to show that there were plausible courses of alternative action, such as disclosure or freezing the option to buy the shares, that would not have adversely affected the price of stock in the plan.

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