Chicago partner Ted Becker was quoted in a National Center for Employee Ownership publication titled, “Employee Ownership Report.”

The article pointed out that although the DOL perceives that ESOP transactions do not benefit employees, to date, no one has attempted to explore the characteristics of ESOPs in a way that would allow an objective assessment of the DOL’s perception. Data that has been available for a long time shows that ESOP participants on average have accumulated substantially greater wealth through ESOPs than employees in non-ESOP companies. This implies that ESOPs are good for participants, but it is not enough to satisfy the DOL, since data on average growth in participant balances does not necessarily answer the question whether the initial valuation of ESOP company stock may have been too high. 

Ted emphasizes that “most of the recent lawsuits and a number of recent DOL investigations concern pre-recession transactions and that stock prices went down after the transactions because of the downturn in the economy, rather than anything that was inherently wrong with the transaction valuations.”

Ted, who defends ESOP companies, their directors and officers, ESOP trustees and selling shareholders in lawsuits brought by ESOP participants and the DOL, and in DOL investigations, explained, “while the law requires ESOP trustees to engage in a prudent process in approving valuations, it does not require the trustee to have foreseen the economic downturn of 2008.”

Essentially, the DOL seems to be asserting that ESOP trustees should do more than engage in a prudent process in approving valuations. This position is disturbing to some and represents a departure from decades of case law as well as the DOL’s own prior interpretations of ERISA.