Explore a case study where ESOP owners and a bank trustee were sued for an overpriced transaction, resulting in a $6.5 million repayment order. Learn key takeaways for successful ESOP deals.
November 18, 2019
Introduction:
Selling a business to an Employee Stock Ownership Plan (ESOP) for employee retirement benefits can be a viable exit strategy. This blog explores a case where business owners sold their company to an ESOP but ended up being sued for an overpriced transaction.
The Story:
In 1980, a husband and wife founded a company that designs and sells equipment to soft drink manufacturers. The company’s generous benefits, including an ESOP and healthcare coverage, helped retain employees. Despite having major customers like Coca-Cola and Dr. Pepper, there were no solid buyer offers by November 2010. So, they decided to sell their majority stake to the ESOP, facilitated by a bank acting as the trustee.
The transaction closed around 6 weeks for $20.7 million, funded by different sources. After the sale, the husband and wife retained significant control over the ESOP and the company’s management.
Legal Trouble:
In 2014, the United States Department of Labor sued both the bank and the husband, alleging they had facilitated an overpriced deal. The court ruled that the ESOP had overpaid the owners by $6.5 million and held both the bank and the husband accountable for repaying this amount. The court criticized the bank for not ensuring that the ESOP paid a fair price.
The court found that the valuation was flawed due to assumptions that didn’t hold true. The bank was faulted for not pushing for more accurate methods and projections. Overall, the court felt the bank rushed the process and didn’t prioritize the ESOP’s interests.
Key Takeaways:
1. Using an independent trustee doesn’t guarantee protection from liability for overpricing.
2. Owners should rely on experienced ESOP professionals for due diligence.
3. Thorough valuation methods and reasonable assumptions are crucial to justify higher prices.
4. Rushing the process can lead to inadequate evaluation and potential legal issues.
Case Reference:
This case is referred to as Pizzella v. Vinoskey, Case No. 6:16-cv-00062, United States District Court, W.D. Virginia, Lynchburg Division (August 2, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
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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