Explore the intricate world of M&A with our latest blog post, “Lessons Learned: The Risks of ESOP Transactions in M&A.” Delve into the captivating story of Dale and Julie, owners of a Utah-based computer products company, as they navigate unexpected challenges in their ESOP exit strategy. Uncover valuable insights for entrepreneurs and gain a deeper understanding of the complexities surrounding ESOPs. Don’t miss this M&A narrative that sheds light on the risks and lessons in the realm of employee stock ownership plans.
M&A Stories
August 8, 2018
Dale and Julie, a couple who owned a Utah-based computer products company since 1952, decided to explore an ESOP as their exit strategy. The journey, however, took an unexpected turn, providing valuable lessons for entrepreneurs considering similar paths.
Between 2007 and 2014, Dale and Julie gradually sold 82% of their company’s stock to the ESOP trust in a series of transactions. Unfortunately, Dale passed away in 2012, leaving Julie in charge of both company and ESOP finances. She assumed the role of Chairman of the ESOP Administration Committee, acting as the Plan administrator.
In the aftermath of these transactions, trouble ensued. Post-2014, an ESOP participant and the ESOP trustee filed a lawsuit against Julie, alleging securities fraud under Utah law and violations of ERISA, the federal law governing ESOPs.
Julie sought to dismiss the lawsuit, arguing that even if the allegations were true, they wouldn’t establish liability. However, the court disagreed, deeming the plaintiffs’ claims sufficient to proceed with litigation.
The focus of the allegations centered on the 2013 and 2014 stock sales. Plaintiffs contended that Julie, leveraging her position, manipulated and misrepresented financial data, overstated per-share prices, concealed truths about the company’s financials, and caused the trust to overpay for the shares.
Similar accusations were made regarding the 2014 stock sale, where Julie allegedly created misleading budgets, altered financial statements, and obstructed fair market value determination. The result: the trust allegedly paid more than fair market value for the company’s stock.
Commentary: While selling a company to employees through an ESOP can be an appealing exit strategy, the case of Julie and Dale underscores potential pitfalls. Opting for an independent trustee and ensuring accurate financial information is provided can prevent the kind of challenges they faced.
Case Reference:
Lawrence v. Potter, Case No. 2:17-CV-1239 TS, United States District Court, D. Utah, (July 30, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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