Judge Rules Releveraging an ESOP Is Not a Fiduciary Violation

Many mature ESOP companies use releveraging to help manage their repurchase obligations and ensure there are shares to allocate to new participants over time. Releveraging especially helps manage repurchase costs when the company’s share price increases quickly. In releveraging, ESOP companies borrow money to purchase shares, typically from former employees, and then allocate those shares over the life of the loan. This new debt can have a temporary impact on share value. Part of that impact is offset by the additional shares allocated to existing participants, but many companies create a floor price plan that protects at least more senior employees from a reduction in their stock value as a result of the additional debt.

Central States Manufacturing is a rapidly growing company with a mature ESOP and a quickly rising stock price. It chose to releverage its ESOP to purchase shares from former employee participants so those shares could then be reallocated for all participants in the plan.

In Shipp v. Central States Manufacturing, No. 5:23-CV-5215 (W.D. Ark. July 5, 2024), former employees of Central States sued over the releveraging plan. The plaintiffs alleged that the releveraging was unneeded and there were other ways for the company to get shares to new employees and manage the company’s ongoing repurchase obligation. The defendants argued that the employees had not shown standing because they were not harmed by the transaction and that the trustees had an obligation to act in the best interests of the plan as a whole and not just for former employees who still had accounts. The plaintiffs did not argue that releveraging per se was improper, but that the manner in which it was done was.

On March 30, 2026, the judge in the same court ruled that the releveraging was proper, granting summary judgment. First, the judge ruled that the decision to releverage was a corporate decision appropriately made by the board of directors. The fiduciary obligation rests with the ESOP trustee, GreatBanc, to make sure that the price that the ESOP pays is at fair market value and that the terms of the deal are not harmful to the plan participants. Importantly, the court ruled that the trustee’s obligation is to look at the interests of all of the participants in the plan and not a subset of employees whose account values might be affected because they will leave before the releveraging is complete.

The decision is at the district level and so not precedential. Like any decision of this type, it is limited to the specific facts involved. If the court had ruled against releveraging, however, it could have spurred additional lawsuits against companies that use this practice.

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