Read about the recent case where the Department of Labor (DOL) filed a lawsuit against ESOP company directors for alleged breach of fiduciary duties. Gain insights into the implications of appointing an independent ESOP trustee and ensuring fairness to ESOP participants in M&A transactions.
M&A Stories
March 29, 2021
Introduction:
In a recent case, the United States Department of Labor (DOL) filed a lawsuit against the directors of an Employee Stock Ownership Plan (ESOP) company, alleging breach of fiduciary duties in a transaction. The DOL claims that the independent ESOP trustee overpaid for the majority owner’s stock, resulting in a purchase price 2.5 times higher than the previous five years’ ESOP valuations.
The Deal:
The ESOP company, a Minneapolis-based manufacturer, had a 5-member board that included the president, VP of Finance, and VP of Human Resources, all of whom served as ESOP trustees. The founder’s son, who was about 80 years old, owned 76% of the company, while the ESOP owned the rest.
In 2011, the board began considering an ESOP transaction, and a financial advisory firm estimated the seller’s stock value at around $63 per share. Ultimately, the directors resigned as ESOP directors and a well-known bank with vast experience as an ESOP trustee was appointed as an independent ESOP trustee.
The estimated value increased to $85 per share when the deal closed on October 5, 2011. Management worked on financing with a bank, but the bank raised concerns about the aggressive projections based on past performance.
The Lawsuit:
The DOL sued the independent trustee and three officers, who were also directors, for alleged violations of federal law (ERISA). The DOL accused the directors of breaching their duties of loyalty and prudence to the ESOP, suggesting they were aware of the unreasonably high selling price.
This case is referred to as Scalia v. Reliance Trust Company, No. 17-cv-4540 (SRN/ECW), United States District Court, D. Minnesota, (March 2, 2021).
Key Takeaway:
This case highlights that appointing an independent ESOP trustee may not shield management from ERISA liability if the transaction is unreasonably overpriced. Directors should exercise caution when dealing with ESOP valuations and ensure fairness to the ESOP participants. The outcome of the lawsuit is pending as the litigation continues.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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