The Employee Ownership Update
April 24, 2018
Sentry Equipment Suit by DOL Will Proceed to District CourtThe Department of Labor alleges that the trustee of the ESOP at Sentry Equipment Erectors should not have relied on the valuation report for a $21 million transaction. In the case (Acosta v. Vinoskey, No. 6:16-cv-00062-NKM-RSB, 2018 BL 134718 [W.D. Va. Apr. 17, 2018]) (PDF of opinion), Senior Judge Norman K. Moon of the U.S. District Court for the Western District of Virginia ruled that an employee of the ESOP trustee, Evolve Bank, could not be personally held liable as a trustee. In a previous ruling Judge Moon had allowed claims against the employee, Michael New, to proceed, but ruled here that New did not have final approval over the ESOP transaction and was therefore not a fiduciary. The judge allowed the DOL's expert witness, Dana Messina, to give limited testimony, rejecting other parts of the testimony, calling the theory of damages he presented "novel and underdeveloped."
DOL Seeks to Void Fiduciary IndemnificationIn an April 23 article in the National Law Review, Erin Turley, Allison Wilkerson, Eliot Burriss, Emily Rickard, and Rick Stepanovic observe that the Department of Labor has recently argued in litigation that agreements that indemnify ESOP fiduciaries are void against public policy. Indemnification means that one party, in this case the company sponsoring an ESOP, agrees to compensate another party, in this case the ESOP fiduciary, for losses incurred in connection with the performance of the party's duty. Typical indemnification clauses note that they do not apply to losses incurred because of a breach of fiduciary duty or by bad faith, gross negligence, willful misconduct, or material breach of agreement.
The DOL argues that Section 410 of ERISA prohibits blanket indemnification of ESOP fiduciaries. The authors examine various cases in which this idea has been tested, and note that circuit courts have come to different conclusions about indemnification agreements. In some cases, the DOL has asked for indemnification agreements to be voided as part of settlement agreement. The authors observe that voiding indemnification provisions "can limit defense budgets, make settlements more likely, and potentially create dangerous precedent for ESOPs."
Employee Ownership Conference in AtlantaOver 1,800 people convened in Atlanta last week for the NCEO's annual employee ownership conference, setting another attendance record. The NCEO staff and board thank everyone who contributed to the event, including the wonderful volunteers, the host committee, the speakers, and the sponsors. The conference is a community gathering, and we look forward to seeing you at future events.
Company Stock Blues at General ElectricIn an April 22 article (subscription required) in the Wall Street Journal, Thomas Gryta tracks the impact of the decline in General Electric's share price on retirees. It notes that 43% of GE's shareholders are retail investors, many of them retired GE employees, who took advantage of a stock purchase plan in which GE matched 50% of employee contributions to buy stock. The article quotes NCEO founder Corey Rosen, who draws a distinction between employee and employer contributions, and notes "if you are looking at retirement, then diversification is a good thing."
Employee Ownership Clusters: Solar Companies in the San Francisco Bay AreaAn April 13 article in the North Bay Business Journal notes that three of the pioneering solar companies in the San Francisco Bay Area are at various stages in a journey toward employee ownership. Employee-owned companies do often cluster in industries, such as breweries and health care, and in geographic areas, such as Huntsville, AL, and the state of Ohio.
SolarCraft is a 34-year-old solar company, sold by its two founders to an ESOP in 2015. According to the article, Bill Stewart, one of the founders, "pointed out that they had more lucrative offers to sell to larger companies. Some of his friends who owned solar businesses at that time did sell and later told him it was the worst decision of their life." Gary Gerber, the CEO of Sun Light & Power, created what he calls a "BESOPerative," which is a B corporation that is owned by an ESOP and has a cooperative governance structure. The third company, Solar Works, is on a medium-term plan to create employee ownership.