June 15, 2020

NCEO and ASA File Amicus Briefs in Choate ESOP Case

Update on July 16, 2020: Pursuant to a motion by the plaintiff-appellant, the Fourth Circuit has today dismissed the plaintiff's appeal of the district court's judgment.

The NCEO took the rare step of filing a friend of the court (amicus curiae) brief in the case Lee v. Argent, in which an ESOP participant is challenging the price the ESOP paid for shares of Choate Construction in a leveraged ESOP transaction. The NCEO’s brief makes two arguments.

First, in response to a claim in an amicus brief submitted on behalf of the plaintiff by the Pension Rights Center, the NCEO’s brief argues:

The amicus curiae supporting Plaintiff-Appellant, for example, maintains that ESOPs “subject[] employees to enormous, uncompensated risk” and that ESOP transactions “involve inherent risks” and are “vulnerable to abuse.” While ESOPs, like any corporate structure, can be subject to abuse and risk, the implication that ESOPs are inherently excessively risky and abusive is contrary to the best academic research. These unsubstantiated statements undermine Congressional intent to encourage employee ownership.

Second, the brief challenges the plaintiff’s argument that the price the ESOP can pay for the shares of the company, i.e., fair market value, should not be more than the equity value in the ESOP after debt has been taken on to buy the seller's shares. On this front, the American Society of Appraisers (ASA) also filed an amicus brief, which argues that “The FMV Standard Required by ERISA § 1002(18) Precludes the Valuation Standards that Plaintiff and PRC Propose,” and suggest that the plaintiff’s case rests on incorrect assertions, including that “The Post-Transaction Valuation is Evidence of Pre-Transaction Overpayment” and “‘ESOPs are Improper If Sellers Use Them Because They Cannot Find a Private Buyer for Their Stock” [capitalization from the original].