ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2024
Categorizes and summarizes litigation over company stock in ESOPs and 401(k) plans.
By Corey Rosen
Format
Description
This 132-page 8.5 x 11" publication briefly summarizes decisions in ESOP and 401(k) company stock cases from 1990 through June 2024. The cases are organized by issue, so cases that involve multiple issues appear in more than one section. Fifteen ESOP cases, all but one in private companies, were added for the 2024 edition. A total of 458 ESOP cases and a number of 401(k) cases are included. The publication categorizes all the court decisions in 401(k) company stock cases from 1990 through mid-2024 and provides brief summaries for decisions starting in 2010. Appendices discuss what the Supreme Court's Dudenhoeffer decision has meant for ESOPs, plus key elements in recent DOL fiduciary process agreements reached in settlements. We have tried to be comprehensive, but advisors must always supplement this with their own research.
Here's what's new in the 2024 edition: The last 12 months since June 2023 (the cutoff date for the prior 2023 edition) saw 15 new ESOP cases make it to court, all but one in private companies, although there were some additional decisions in some ongoing cases. Only two of the cases were initiated by the U.S. Department of Labor (DOL). Valuation continues to be the leading cause of new cases, but in the last two years, many new cases have concerned arbitration clauses. Courts have generally been unfavorable to these provisions.
Table of Contents
- Introduction
- Special Note on the Presumption of Prudence Issue
- DOL Process Agreements
- Summary of ESOP Case Decisions
- ESOP Cases
- Arbitration
- Claims Against Providers
- Deferral of Gains Issues
- Disclosure of Information
- Distribution and Diversification
- Dividends
- Employment Rights and Plan Eligibility Issues
- ESOPs as a Takeover Defense
- Executive Compensation
- Indemnification and Insurance
- Lenders as Fiduciaries
- Management of Plan Assets: General
- Management of Plan Assets: "Stock Drop" Cases pre-Dudenhoeffer (Including Presumption of Prudence)
- Party-in-Interest Definitions
- Plan Qualification
- Qualification for Set-Asides
- S Corporation Anti-Abuse Rules
- Securities Law Issues Other Than Disclosure
- Settlements
- Standard of Prudence After the 2014 Dudenhoeffer Case
- Standing
- State Law Claims
- Tolling
- Valuation
- Venue
- Voting, Tendering Rights, and ESOP Governance Rights
- Who Is a Fiduciary?
- 401(k) Cases
- Claims Against Providers
- Issues with Offering and Holding Company Stock Other than Presumption of Prudence
- Presumption of Prudence Issues
- Right to Jury Trial
- Securities Law and Required Disclosure Issues: Disclosure May Be Required
- Securities Law and Required Disclosure Issues: Disclosure May Not Be Required
- Settlements
- Standard of Prudence After the 2014 Dudenhoeffer Case
- Standing Affirmed for Participants
- Standing Not Affirmed for Participants
- Other Standing and Class Certification Issues
- Who Is a Fiduciary?
- Appendix 1: What the Supreme Court's Dudenhoeffer Decision Means for ESOPs
- Key Points
- Overview
- Standard of Prudence
- Effect on ESOPs
- Appendix 2: Key Issues in DOL Settlement Agreements in GreatBanc, First Bankers Trust, James Joyner, Alpha Investment, and Lubbock National Bank Cases
- Valuation Assessment
- Loan Structure
- Providing the Right Information to the Appraiser
Excerpts
From "Claims Against Providers"
Great American Fidelity Insurance Company v. Stout Risius Ross, Inc., No. 19-cv-11294 (E.D. Mich. Aug 23, 2021): A court allowed Great American not to defend the ESOP valuation firm Stout Risius Ross (SRR) it had insured in the Appvion ESOP case. In a previous decision, the court ruled that “in order to fall under Exclusion F [the exclusion in the coverage that would have exempted Great American from coverage], Great American must demonstrate as a matter of law that the underlying claims are based on or arising out of a violation of ERISA. Great American has failed to make such a showing as a matter of law.” In subsequent litigation in the Appvion case, plaintiffs lost their argument that there had been an ERISA violation, but the court allowed an amended complaint under securities law. The court in this case said that because Exclusion F does not apply to any claim "based on or arising out of actual or alleged violation of" the Securities Acts of 1933 and 1934, Great American can allege that SRR violated that act. SRR argued that at best the claim over securities law was a negligence claim (although it did not admit to any error on the valuation in fact), but the court took a more aggressive view of Great American’s right not to cover SRR.
Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (9th Cir. Oct. 23, 2023): The Ninth Circuit said that the Department of Labor did not have to pay attorneys’ fees to the defendant attorneys in a valuation case the DOL decisively lost. In Walsh v. Bowers, et al., a court definitively ruled for the defendants and rejected the DOL’s valuation expert as unreliable. The defendants sued for attorneys’ fees, charging that the DOL should never have brought the case. The court ruled that “the government’s expert, despite his errors, arguably had a reasonable basis—at least at the time of trial—in questioning whether the company’s profits could surge by millions of dollars in just months.” In Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (9th Cir. Jan. 7, 2024), the Ninth Circuit denied a motion for rehearing.
From "Valuation"
Gough v. Tennyson, No. 4:17-cv-02215-PJH (N.D. Cal. Mar 2, 2018, motion for preliminary settlement approval): A district court approved a $1.75 million settlement in a case in which executives bought a company from an ESOP at an allegedly considerable discount to fair market value. The ESOP paid $7.425 million to buy 100% of the company’s stock in 2005, but the company declined in the recession until it was worth only $300,000 in 2010. It rebounded to $2.637 million in 2012. In 2015, three executives bought the shares from the ESOP for $100,000. See also under “Who Is a Fiduciary?”
Acosta v. First Bankers Tr. Servs., Inc., No. 5:16-cv-00328-gwc (D. Vt. Apr. 27, 2018) (proposed consent judgment): The DOL and First Bankers Trust settled a lawsuit alleging that the ESOP at Sonnax Industries overpaid for its shares. The ESOP had purchased the shares for $48.8 million in 2011. Sonnax agreed to pay ESOP participants back $2 million, two executives will pay $200,000 in civil penalties, and First Bankers $25,000 in penalties. Sonnax was sold to Berkshire Hathaway in April contingent on the settlement for $65 million, a 35% increase over the 2011 valuation.
Acosta v. Reliance Trust Co., Inc., No. 5:17-cv-00214-D (E.D.N.C. Sept. 18, 2018) (consent judgment): Reliance Trust agreed to pay $4.5 million to settle a DOL lawsuit that alleged the investment banking firm caused the ESOP at Tobacco Rag Processors, Inc., to overpay for company stock. The sale for $104 million took place in 2011. In that case, the DOL alleged that Reliance had “failed to ensure that the financial information provided to the appraiser and used in its valuation was accurate and complete, to thoroughly understand the appraiser’s valuation, and to meaningfully question the assumptions underlying the valuation.” Reliance Trust did not admit any wrongdoing.