Employee Ownership Legal Digest (14) Archive

Stay informed on the latest legal developments impacting employee ownership. This page provides timely and concise summaries of key cases and rulings, contributed by experienced attorneys, to help the entire employee ownership community understand their implications, and also offers access to NCEO's archive of prior content.

Corey Rosen

ISCO plaintiffs must arbitrate their claims

In Best et al v. James., No. 320-cv-299-JRW (W.D. Ky., Sept. 22, 2022) a court ruled that plaintiffs must agree to arbitrate their claims against executives of ISCO Industries concerning the buyback of company shares from the ESOP. In a prior 2019 decision, Swain v. Wilmington Trust N.A., a federal judge approved a $5 million settlement with a class of employees at ISCO Industries who alleged the ESOP had overpaid for the shares. The settlement amounted to about $12,000 per employee, minus legal fees and taxes. The ESOP paid $98 million for the shares with a note from the sellers at a 2.4% annual rate over 25 years. Post-leverage, the shares were revalued at $39 million. In settling, Wilmington denied it had done anything improper.

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Corey Rosen

Aetna, CVS defeat claim in suit over stock price drop in 401(k) plan after merger

In Radcliffe v. Aetna, Inc., 3:20-cv-01274-VAB (D. Conn. Sep. 30, 2022), CVS and Aetna defeated a claim that the defendants acted imprudently in not disclosing information about the financial risks facing CVS that emerged after the merger. CVS acquired Aetna in 2018. Aetna employees had been able to invest in Aetna stock in their 401(k) plans. With the merger, Aetna shares became CVS shares. CVS stock fell sharply after it disclosed that its acquisition of Omnicare, a long-term health provider, required CVS to take a $2.2 billion goodwill impairment because of financial issues at Omnicare. CVS was also facing litigation (which it ultimately lost) over its prescription pricing policies with hospitals. The plaintiffs argued that information about the impairment and litigation should have been provided to them. The court ruled that the defendants were not fiduciaries, having delegated that authority to a committee that was not the subject of the litigation. More important, the court found that the defendants cannot be held responsible for the choice to move Aetna shares into CVS shares because the allegations made concerned events that only hindsight could show would affect stock price.

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Corey Rosen

Johnson & Johnson Prevails in Stock Drop Suit

In Perrone v. Johnson & Johnson, No. 21-1885 (3d Cir. Sept. 7, 2022) the Third Circuit ruled that the trustees of Johnson & Johnson’s 401(k) plan could reasonably argue that to remove Johnson & Johnson stock from the plan’s investment options in light of litigation over asbestos in its talcum powder could arguably have “done more harm than good” and thus were not obligated to make changes under the doctrine of the Dudenhoeffer decision.

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Corey Rosen

Settlement Reached in Maine Oxy Case:

In Walsh v. Maine Oxy Acetylene Supply, No. 2:20- incv-00326-NT (D. Me. Aug. 26, 2022), parties reached a $6.5 million settlement in a case in which plaintiffs contended that the ESOP trustee and the CEO of the company terminated an ESOP at an improperly low price to orchestrate a favorable deal for members of the board to buy back the 49% of the company the ESOP then owned.

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Corey Rosen

Court Says Trustee in ESOP Case Can Compel Arbitration

In Robertson v. Argent Trust Company, No. 21-cv-01711-PHX-DWL, 2022 WL 2967710 (D. Ariz. July 27, 2022) a district court ruled that Isagenix could enforce a mandatory arbitration clause concerning its ESOP. Courts have recently come to mixed conclusions on this issue. Robertson alleged that the ESOP had overpaid for shares in Isagenix, particularly in light of deteriorating financials. The plaintiff had based her arguments primarily under Arizona law, which prohibits arbitration clauses that are “unconscionable” limits on the right to pursue claims in court. The court ruled that ERISA trumps state law in this matter, however.

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Corey Rosen

DOL and GreatBanc Reach Settlement in Wells Fargo Stock Case

The Department of Labor has reached a $145 million settlement over an investigation in which the DOL alleged that the company’s 401(k) plan paid between $1,033 and $1,090 per share from 2013 to 2018 for Wells Fargo preferred stock. The plan bought preferred shares created just for the plan that converted to $1,000 in Wells Fargo common stock when allocated to participants. The plan borrowed money from Wells Fargo to purchase the preferred stock. Dividends on the shares were used to repay the loan, and then were counted toward the company’s obligations to match employees’ 401(k) deferrals. The DOL believed the plan was set up in a way that employees would receive shares that were less than the value the plan paid for them. A total of $13.2 million of the settlement will be paid as a penalty to the DOL and the rest to participants. Wells Fargo will also redeem preferred shares still held by the plan and exchange them for common stock. GreatBanc is not part of the financial settlement.

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Corey Rosen

KPC Workers Agree to $5 Million Settlement

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK (C.D. Cal. Jan. 15, 2021), employees agreed to a $5 million settlement with KPC Healthcare in an ERISA valuation case. The ESOP bought 100% of KPC in 2015. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was 9 to 15 times higher than the price of company shares on the 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 suit named both KPC and the trustee, Alerus, and that suit continues.

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Corey Rosen

Symbria ESOP Valuation Lawsuit Can Continue, but Non-Trustee Defendants Dropped from Case

In Placht v. Argent et. al., No. 1:21-cv-05783 D (N.D. Ill., August 10, 2022), a district court allowed plaintiffs to proceed in an ESOP valuation case against the trustee, Argent Trust, but not the 12 other named defendants, who are all sellers in the transaction. 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 allege the ESOP overpaid for the shares. The court dropped 12 selling shareholders from the suit because they were not fiduciaries, but allowed claims against certain managers to continue.

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Corey Rosen

Argent Wins Case on Arbitration Provision

In Robertson v. Argent Tr. Co., No. CV-21-01711-PHX-DWL (D. Ariz. Jul. 27, 2022), a district court ruled that an arbitration clause in the plan document applies and dismissed the case against the ESOP trustee, Argent Trust. Robertson alleged that the ESOP’s purchase of shares from the former owners of Isagenix was for an excessive price. Argent said the plan document stated all covered claims “must be brought solely in the Claimant’s individual capacity and not in a representative capacity or on a class, collective, or group basis. Each arbitration shall be limited solely to one Claimant’s Covered Claims and that Claimant may not seek or receive any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to any Employee, Participant or Beneficiary other than the Claimant.” Robertson said that the provision overly restricts her rights under ERISA, a position some other courts have agreed with. She also argued Arizona law forbids this kind of arbitration clause.

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