Court Rules that Acquiring Company Employees Can Participate in ESOP Windfall

In Fox v. Herzog, Heine, and Geduld, Inc., No. 01-CV-1827 (D.N.J., 12/27/05), a district court ruled that employees of Merrill Lynch could participate in the allocation of suspense account shares previously held in the Herzog, Heine, and Gedlud (HHG) ESOP after Merrill Lynch acquired HHG. HHG's ESOP received $354 million worth of Merrill stock. The HHG ESOP loan had not been fully repaid at the time of the acquisition, so a number of shares had not yet been allocated. The acquisition price was enough to repay the remaining loan and leave a windfall. HHG's ESOP was merged into Merrill Lynch's ESOP, and the suspense account shares were allocated to all employees of the combined firms.

Two former HHG executives sued, arguing that the ESOP trustee should have prepaid the loan so as to release the shares just to HHG employees. The court, however, ruled that there had been no loss to the plan; the acquisition procedure only changed who benefited form the shares. The court further ruled that the plaintiffs had asked for the shares or their monetary equivalent to be reallocated to HHG plan participants, but that because the plaintiffs did not have the unallocated shares in their accounts, they could not claim any right to them.

The case raises an interesting question of who should benefit from an ESOP acquisition-the employees of the target or all the employees of the merged company.