Chicago partner Ted Becker, counsel Rick Pearl, and associate Allison Sumi Crowe provided the “Legal Update” for the March 2017 issue of ESOP Report, in an article titled, “Trial Court Rules ESOP Trustee Engaged in Prohibited Transaction.”
The article discusses the result of Brundle v. Wilmington Trust, N.A., which recently underwent a six-day bench trial in the U.S. District Court for the Eastern District of Virginia. The court ruled against the ESOP trustee and in favor of the plaintiff, a former employee of Constellis Group, Inc. and former participant in its ESOP. The court found that the trustee engaged in a prohibited transaction under ERISA by failing to ensure that the ESOP paid no more than adequate consideration for the stock in the company and, as a result, damaged the ESOP by overpaying more than $29 million.
The transaction in question took place when the ESOP purchased 90 percent of the company’s outstanding common stock from shareholders who were either founders or initial investors in the company. The sellers then converted their remaining 10 percent into warrants, resulting in the ESOP owning 100 percent of the common stock.
The court found that the trustee did not prove that it engaged in a prudent process in evaluating the transaction. Although the trustee engaged an independent valuation advisor to appraise the value of the stock and render a fairness opinion, the court concluded that the trustee did not adequately “probe the assumptions and conclusions of the valuation.”