Employers can offer a wide range of retirement benefits to their employees. Most commonly, employees receive a retirement plan such as a pension or 401(k). Another type of retirement benefit is an Employee Stock Ownership Plan (“ESOP”), which is a program that provides employees with an ownership interest in their company, and like pensions and 401(k)’s, is regulated by the Employee Retirement Income Security Act (“ERISA”).
On March 13, 2017, a class of employees from Constellis Group Inc. (“Constellis” or the “Company”) received a $30 million judgment because their ESOP overpaid for a private security firm.
In 2013, Constellis’ owners sold their company to an ESOP to generate liquidity and boost employees’ benefits. Wilmington Trust NA (“Wilmington”) then became the trustee for the employees, which hired Stout Risius Ross Inc. (“SRR”) to analyze the fair market value for the employees. By November of that year, SRR calculated Constellis’ fair market value to be between $275 million and $330 million. However, earlier that year, in January, the McLean Group calculated the Company’s value at $165 million using a similar method. Despite the significant difference between the two companies’ valuations, Wilmington chose not to delve further into the mechanics of the SRR analysis and used its calculations for the ESOP negotiations. One month later, Wilmington negotiated a $201.5 million sale price for the employees. Seven months after the ESOP transaction was finalized, it sold to Academi LLC for $281.1 million, which included a $20 million payment to the ESOP shareholders.
Two years later, shareholders filed suit, alleging Wilmington violated ERISA by letting them overpay for Constellis. According to U.S. District Judge Leonie M. Brinkema, Wilmington failed on four accounts as the ESOP’s trustee when it (1) failed to consider the McLean valuation when negotiating the sale, (2) took SRR’s reliance of Constellis’ own projections at face value, (3) did not question SRR’s application of a 10 percent premium, and (4) did not question SRR’s decision to round certain numbers up. Although Judge Brinkema acknowledged that none of the failings would have independently constituted a breach of Wilmington’s duty, altogether they demonstrate how Wilmington did not adequately engage in the Constellis transaction.
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Campbell, Braden. “Constellis Employees Win $30M in ERISA Suit.” Law360. Last modified on March 14, 2017.