An employee stock ownership plan ("ESOP") is an employee benefit plan that
invests primarily in common stock of the sponsoring corporation. An ESOP can
purchase stock from the corporation (or its owners), or the corporation can
contribute stock to the ESOP. If the ESOP borrows money to purchase the
corporation's common stock, the stock is allocated to participants as the
corresponding loan (if applicable) is paid off. If the stock is contributed to the ESOP
(non-leveraged ESOP), then the stock is usually allocated to the participants based
on their relative level of compensation (not to exceed IRS limits). There are several
restrictions related to ESOPs and they can be very expensive to establish,
administer, and terminate.
What kind of lawsuits arise in the establishment and administration of
an ESOP?
Improper Valuation of Company Stock. Because most ESOPs are established
and maintained by privately held corporations, the valuation of the the corporation's
stock (held by the ESOP) is determined by an Independent Appraiser (not by a
stock quote on a national exchange) and is usually subject to great debate. In
several cases, a court has determined that the stock purchased by an ESOP was
either "over-valued" (price paid was greater than the "Fair Market Value") or the
stock distributed to the participants was "under-valued" (value determined to be
less than the Fair Market Value of the stock). In the case where the stock was
"over-valued," the ESOP was entitled to recover the amount of overpayment. In the
case where the participant received a distribution of stock that was "under-valued",
the participant was entitled to recover the amount of underpayment. It is important
to keep in mind that there are several requirements that dictate how a valuation
report should be written and who can compile the report. If you suspect a valuation
problem, then you may want to Contact Us to evaluate the situation and discuss
your options.
Distribution Options. The distribution requirements for ESOPs are very
complicated and mandate that participants are provided with certain types of
distribution options. A key requirement is that participants are given the right to
receive company stock at the time of distribution (unless an exception applies). If a
participant receives a distribution of company stock from the ESOP, he or she
should also be given the right (a "put option") to sale his company stock back to the
company (or ESOP trust) for cash. If the company cannot pay the full amount in
cash, then the participant should receive a "secured" promissory note for any
unpaid balance. The promissory note must be secured by property (i.e. fixed
assets) of the company. If the company fails to provide these rights and/or
promises to the participants, the company and plan fiduciaries may be liable for lost
earnings to the participant.
Mergers and Acquisitions. Because an ESOP owns part or all of a company's
common stock, the trustee of an ESOP can be approached by interested parties for
a potential purchase or merger of the company. In these situations, the trustee has
certain fiduciary duties to the ESOP and the participants of an ESOP and must act
solely in the interest of the participants. If the trustee breaches his fiduciary duties
to the participants, then the trustee can be personally liable for the losses caused
to the ESOP. In some cases (to avoid a conflict of interest), an independent trustee
should be appointed (to replace an "insider" trustee) to make a decision on how to
proceed with a third-party's offer.
Breach of Fiduciary Duties - Bankrupt ESOP. The trustee of an ESOP has a
fiduciary duty to act with the same care, skill, and diligence as a prudent man would
follow in similar circumstances. Any time an ESOP company has filed bankruptcy, it
is important to ask why? Could the fiduciaries have prevented the bankruptcy. Did
Did the trustee conduct a repurchase liability study? Did the trustee perform a cash
flow analysis prior to first ESOP transaction? Did the trustee pay to much for the
company's stock. These questions, along with several others, should be raised,
analyzed and pursued, if appropriate, any time an ESOP company has declared
bankruptcy.
If you would like us to investigate a contemplated or past bankruptcy, please
Contact Us.
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purposes only, and should not be relied on any respect. Visitors should consult with legal
counsel in order to assure a thorough and proper application of the complex rules that are
highlighted here are properly applied.
