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
The 2017 tax bill contained provisions that allowed employees in private companies that provide non-qualified stock options and restricted stock units to at least 80% of their workforce to defer taxation on the awards until up to five years after termination. The law was intended to prevent employees from ending up with grants that were taxed even though the resulting shares could not yet be sold.
Corey Rosen
In Acosta v. Saakvitne, No. 1:18-cv-00155-SOM-RLP, (D. Haw. inclinations Jan. 13, 2019) a district judge told counsels that she was inclined to rule that two owners of a Hawaii construction company that sold to an ESOP could be considered fiduciaries of the plan because they hired and were responsible for monitoring the appraisal firm and failed to provide realistic financial projections. The lawsuit also names the plan’s trustee, who has since died. The statement is not a decision, but advice to parties on how to prepare for oral arguments.
Corey Rosen
In Cunningham v. Wawa, Inc., No. 2:18-cv-03355-PD (E.D. Pa., Ja. 10, 2019), a judge allowed a lawsuit against Wawa over changes in its ESOP to move forward. Plaintiffs allege that participants in the Wawa ESOP were harmed when the company amended the plan so that former employees who had stock in their accounts had to have the shares purchased and moved to cash investments. Wawa had previously settled with a group of plaintiffs but sought to dismiss the case from the second group. The judge agreed that the change did not violate the anti-cutback rule, but agreed that plaintiffs had sufficiently alleged a case that a change from stock to cash can, in effect, only be done prospectively, not for those who have already left employment under the prior terms of the plan. The lawsuit also alleged that their shares had been improperly valued, that plaintiffs relied on language from the SPD that seemed to prevent such a change, and that their rights had been misrepresented.
Corey Rosen
In Acosta v. Reliance Trust, No. 0:17-cv-04540- SRN-ECW (D-Mon. Ja. 7, 2019), a district court ruled that Reliance Trust could not bring the estate of a now deceased owner into a lawsuit the DOL has filed against Reliance in a case involving an alleged overvaluation of shares for sale to the ESOP. Reliance argued that the agreement with the ESOP stated that if an overvaluation was found, the seller would reimburse the ESOP trust, but the DOL argued that a) it had not sued the estate in this action and b) that Reliance’s interest in the case was the same as the estate’s, so it was not necessary to include the estate in the action.
Corey Rosen
Jander v. Retirement Plans Committee of IBM, No. 17-3518, (6th Cir., Dec. 10, 2018) is a potentially important ruling that runs against recent trends in stock drop cases. The Second Circuit reversed and remanded a lower court ruling that found that the trustees of IBM’s ESOP were not in violation of their fiduciary duty when they failed to disclose that a major division of the company was overvalued. The lower court ruled that plaintiffs failed to show disclosure would not have done more harm than good. The Sixth Circuit, however, ruled that this standard is too strict. The court said the Dudenhoeffer ruling laid out two conflicting standards for determining if a fiduciary should have concluded an action would have done more harm than good. The first is whether an average fiduciary would have made that conclusion; the second is that any fiduciary could have made that decision. Here the court chose not to decide which standard applied, saying that the plaintiffs met either test. The plaintiffs had convincingly argued, the court said, that early disclosure and correction would not have resulted in more damage to the stock price than ultimately resulted when the division in question was sold and information came out about the accounting irregularities and other issues the division faced. The fiduciaries, the plaintiffs argued, could have taken action to correct these issues earlier and disclosed them to the market. In a presumably efficient market, the court said, the price would ultimately reflect the problems anyway. In light of all this, the court said the plaintiffs had made a sufficient plea to require remanding.
Corey Rosen
In Sulyma v. Intel Investment Policy Committee, No. 17-5864 (9th Cir., Nov. 28, 2018) the Ninth Circuit ruled on a statute of limitation claim involving Intel’s 401(k) plan. While employer stock was not involved, the decision is important for ESOP cases. Claims under ERISA must be brought the earlier of six years from when a) a breach of ERISA took place or b) the last date on which the fiduciary could have repaired the breach or c) three years after the plaintiff had actual knowledge of the breach. The Sixth Circuit has ruled that if an employee is given material stating the risks of an investment or other ERISA issue or right, that that constitutes actual knowledge. In this case, the plaintiff agreed he got the material, but said he did not read enough of it to understand the new investment options. The court said that this was enough to show he did not have actual knowledge. Under this interpretation, defendants have to show not just that they made the material available but that employees read and understood it, a difficult task.
Corey Rosen
● Section 415 annual additions limitation: $55,000
Corey Rosen
Due to budget constraints, the IRS stopped issuing determination letters for periodic compliance. Under prior procedures, companies filed for letters of determination in a five-year cycle. The process allowed companies to receive IRS validation of plan changes. While not having to file will save some costs for companies, it means companies do not have any assurances that changes they make to a plan are acceptable to the IRS on audit. As a result, companies need to be particularly diligent in making sure any changes they make to their plans are fully compliant with the law, including periodic internal reviews to make sure plan requirements are being followed.
Corey Rosen
In Spires v. Schools, No. 2:16-cv-00616- RMG, (D.C. S.C., preliminary settlement approved), a district court approved a $5.2 million settlement of $5.2 million in cash plus an additional deposit into the settlement fund account of between $2.475 million and $3.45 million. The suit revolved around the collapse of Piggly Wiggly Carolina (there are other Piggly Wiggly chains, some that have ESOPs; they are separate businesses), which at one time employed several thousand workers at over 100 stores. The plaintiffs accused then third-generation management of imprudent business decisions, including taking very large bonuses, siphoning money into other ventures, the trustee not insisting on independent board members who could have helped steer the company in a different direction, paying excessive rent for some properties in which executives had a financial interest, and paying too much money for notes payable to individuals involved in the transaction. The defendants said the decline was not due their malfeasance but competition from Walmart and Kroger. The story generated major attention in the Charleston area, where the company is based, including a long report, Stickin with the Pig: A Tale of Loyalty and Loss in the Charleston Post and Courier.
Corey Rosen
In Wengert v. Rajendran, No. 16-4571 (8th Cir. Apr. 3, 2018), a circuit court upheld a lower court ruling on how much discretion can be given to plan administrators concerning the timing of distributions. The case revolved around unusual facts. The plaintiff was the divorced spouse of an ESOP company CEO. Compliant with the rules of the plan, the CEO requested a lump-sum distribution of his account on a Friday, but died two days later. He and his spouse were not divorced at the time of the distribution. She submitted a claim for the benefit as the surviving spouse, as defined in the ESOP plan document. The plan administrator said that when the distribution was sent, the CEO was still alive. The spouse said that the distribution was not actually received until after he died. The courts ruled that the administrator had used reasonable discretion in determining the effective date of the distribution.
