Trustee Litigation Risks in Ongoing ESOPs Are Very Low

A new NCEO analysis of ESOP litigation in closely held companies over the last 10 years shows that of 74 lawsuits involving trustees, 54 were for issues dealing with a transaction. The large majority of these concerned the ESOP’s initial purchase of shares from a seller, with the remainder dealing with either a second-stage transaction (1 lawsuit) or the sale of the company (5 lawsuits).

The cases involving ongoing ESOPs involved a wide variety of issues, including changes to distribution policies, egregious financial behavior by key officers, and individual claims over payments. While some raised important ERISA issues, others were simply the result of bad behavior that experienced ESOP trustees would normally not ever allow. The data suggest that the risks of being a trustee in an ESOP with a high-quality team of advisors and a good third-party administrator are extremely low.

Data come from a review of the NCEO's ESOP and 401(k) Employer Stock Litigation Review, 1990-2021.