Employee Ownership Legal Digest
Corey Rosen (10)

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NCEO founder and senior staff member

Corey Rosen

KPC Healthcare Case Comes to an End

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-V-01126-SB-SHK (C.D. Cal. June 5, 2023), Silver Point Capital agreed to a $100,000 settlement over its role in the ESOP at KPC Healthcare. Silver Point had previously won a dismissal from the case. The ESOP bought 100% of KPC in 2015. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was nine to 15 times higher than the price of company shares on a public market just two years before, when the company went private. The company had declining revenues during the ensuing two years, and the stock price fell after the transaction. The other defendants in the case, including Alerus, agreed to a $9 million settlement last year. With the Silver Point settlement, the plaintiff has agreed to drop her pending appeal of the case over the settlement.

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Corey Rosen

DOL ESOP Valuation Regulation Process Outlined

The US Department of Labor (DOL) has stated that it will undertake a formal notice and comment rulemaking “relatively soon” on the adequate consideration requirement governing the valuation of ESOP-held shares. The WORK Act (part of the SECURE 2.0 Act of 2022) required the DOL to set guidelines for ESOP valuation. Simultaneously, the DOL has been facing a formal petition under the Administrative Procedures Act (APA) brought by The ESOP Association (TEA) calling for the same formal rulemaking. The DOL denied the petition under the APA but nonetheless agreed to a formal public notice and comment rulemaking with a process that includes publishing their draft proposed regulation through public notice and providing the opportunity for stakeholder comments. The agency must then respond to those comments before issuing any final regulation.

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Corey Rosen

Triad ESOP Settlement Terms Announced

In Smith v. GreatBanc Trust Company, No. 20 C 2350 (N.D. Ill. Feb. 9, 2023), plaintiffs and defendants agreed to settle a case in which the plaintiffs argued that their ESOP paid $104 million for stock they contend was worth only $4 million. On April 24, the parties filed a settlement agreement for $14.8 million for the court to approve. The settlement follows a 10th Circuit ruling in 2021 that denied the defendants’ motion to force arbitration in the case.

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Corey Rosen

Silicon Valley Bank Employees Can Get Back $25 Million Set Aside for Stock Purchases Under ESPP

About 4,000 employees of failed Silicon Valley Bank will get back $25 million that they had set aside to buy stock at a discount under the bank’s employee stock purchase plan. The plan allowed employees to set aside wages over an offering period to purchase company stock at a 15% discount when the offering period ends. There was some uncertainty about whether the employees could recoup these funds after the bank failed, but on April 25, the FDIC announced that its insurance program would cover these funds.

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Corey Rosen

SBA Adopts New Guidance Making Loans to ESOPs Much Easier

The Small Business Administration (SBA) has taken steps to make loans to ESOPs much easier than under prior rules. The agency had received considerable criticism for issuing requirements for ESOP loans that are inconsistent with the language and intention of the Main Street Employee Ownership Act (MSEOA). That law was passed in 2018 to remove numerous barriers that made SBA loans or loan guarantees for ESOP acquisitions impractical. The law was also designed to allow ESOPs to qualify for loans under the SBA’s 7(a) program, which allows qualified lenders to process loan applications that can receive SBA guarantees. The loans can be for up to $5 million.

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Corey Rosen

Court Denies Envision Motion to Have 10th Circuit Reconsider Its Ruling That Envision Cannot Compel Arbitration in ESOP Case

In Harrison v. Envision Management Holding Company, No. 22-1098 (10th Cir. Apr. 11, 2023), the 10th Circuit denied a request that it reconsider its earlier three-judge ruling that Envision Management Holding Company cannot compel arbitration in a case concerning the price an ESOP paid for shares in the company. Envision asked that the entire court decide the issue. The plaintiff had alleged that the ESOP overpaid for the shares. The plan contained an arbitration clause, which Envision sought to enforce. The court agreed, concluding that “the arbitration provisions of the Plan Document effectively prevent Harrison from vindicating many of the statutory remedies that he seeks in his complaint under ERISA § 502(a)(2),” primarily because arbitration prevents him from pursuing claims for the plan rather than just for himself. The new ruling leaves the prior three-judge ruling intact.

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Corey Rosen

ESOP Trustee Must Face Class Action Lawsuit in Symbria Transaction

In Placht v. Argent et. al., No. 1:21-cv5783 D (N.D. Ill. Apr. 11, 2023), a district court allowed plaintiffs to proceed as a class in an ESOP valuation case against the trustee, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and strategic consulting services to senior-living and post-acute providers. The 2015 deal was for $66.5 million and was funded entirely with debt. Post-transaction, the value dropped to $9.3 million, and was valued at $8.65 million in 2020. Plaintiffs alleged the ESOP overpaid for the shares. Argent did not contest the filing for class action status, but the court ruled that it had to make its own assessment.

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Corey Rosen

Timeliness and Standing Issues Do Not Prevent ESOP Lawsuit over Sale of ESOP Company From Proceeding

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv45 (W.D. Va. Mar. 30, 2023), a court ruled that a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger could continue. The defendants argued that the plaintiff’s original claims were not filed in a timely way. The plaintiff responded that the statute of repose for her claims is tolled (extended) because there was fraudulent concealment prior to the ESOP’s termination on December 31, 2016, and the errors were not cured prior to distributions being made in 2018. The court ruled that there were sufficient allegations of fact concerning concealment to allow the case to proceed.

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Corey Rosen

Suit over Price Paid to Former ESOP Participants Can Continue

In Daly v. W. Monroe Partners, Inc., No. 21 C 6805 (N.D. Ill. Mar. 15, 2023), a district court allowed a former employee of West Monroe Partners to continue, although it ruled for the defendant on some issues. West Monroe, a management consulting firm, had been 100% owned by its ESOP until 2021, when it sold 50% of its stock to an investor and terminated its ESOP. Daly and other plaintiffs were former employees who had their shares repurchased for $515 each just prior to the investment. The plaintiffs alleged that West Monroe had received a number of offers, and that the share price should have reflected the higher price these offers promised.

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Corey Rosen

Plaintiffs Can Proceed with Lawsuit over Sale of ESOP Company

In Rush v. GreatBanc, No. 19-cv-00738 (N.D. Ill., Dec. 16, 2022),a district court allowed a lawsuit to proceed claiming the sale of an ESOP company was for too little money. The company was 100% ESOP-owned until sold in 2016. Rush, representing the class of ESOP participants, was a vice president at the time. The plaintiffs contend that the board should have sought a higher bid and that selling to a strategic buyer would have yielded $55 million more. The plaintiffs are suing the trustee, the board, and several executives.

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