Brundle v. Wilmington Trust
In this case, Wilmington Trust (WT) was hired as an independent third-party trustee for a potential purchase of company shares by the ESOP. A valuation previously performed as of January 2013 concluded an equity value of $165 million with a price per share of $1,838 for voting stock and $1,746 for nonvoting stock.
The valuation performed for the ESOP transaction concluded a value of between $283 million and $338 million with a price per share between $3,865 and $4,600. The presented conclusion was the median per share price of $4,235 (rounded). A transaction occurred at $4,235 per share. The company quickly had several problems which led to a decrease in revenues. The Company was sold to a third party for $281.1 million seven months after the ESOP was formed.
A suit was brought against Wilmington Trust for engaging in a prohibited transaction. The court found the trustee liable stating the trustee had allowed the ESOP to purchase the stock in excess of fair market value. The court believed the trustee had not performed a thorough review of the valuation. The court found the ESOP overpaid by almost $28 million. Wilmington Trust appealed.
The 4th Circuit Court of Appeals has upheld the district court’s liability and damages ruling against Wilmington Trust. The court explained that the focus is not on the trustee’s motives but on whether it acted in the interest of the participants and displayed the “care, skill, prudence, and diligence used by a prudent man acing in a like capacity.” The trustee argued that the ESOP was not actually harmed but the 4th Circuit noted that although the ESOP ultimately benefited from the transaction, the ESOP would have been in a far better position without the overpayment. The court upheld the $28 million damage award.
Acosta v. Vinoskey
This ESOP purchased 48% of a soft drink manufacturer’s stock in 2004 for $220 per share ($9 million). A 2009 valuation for the ESOP concluded a value of $285 per share. In 2010, the original owners were ready to sell the remaining 52% interest to the ESOP. An independent trustee representing the ESOP obtained an independent valuation of the 52% interest. The evaluator concluded a value of $406 per share. The trustee questioned the increase in value and accepted the valuator’s explanation that 52% represented a controlling value while the previous valuation had been a noncontrolling value.
The DOL filed a complaint against the trustee alleging a breach of fiduciary duty by causing the ESOP to pay more than “adequate consideration.” In a much-anticipated opinion, the trial court recently ruled in favor of the DOL, finding the trustee and company’s owner caused the ESOP to overpay for the stock by $6.5 million. The court found that the appraiser’s assumption of control was in error since corporate documents, structure and leadership rules made it impossible for the ESOP to have complete control.
The court noted that while the trustee did review a draft of the appraisal and questioned the appraiser, the trustee did not follow through on how the appraiser dealt with the issues raised in the final report. The court also noted that the trustee never engaged in any negotiation over the price of the shares but rather relied on the valuation for the share price. The court concluded that the trustee had the burden of proving the ESOP did not pay more than “adequate consideration” and failed to do so.
It does not appear that the DOL has any intention of backing off its pursuit of trustees of ESOPs. They will continue to call into question the level of due diligence being undertaken when relying upon a valuation for the determination of fair market value of a Company’s stock in an ESOP transaction. With trial court judges who may or may not understand valuation and ESOP issues making the final judgment, trustees’ fates hang in the balance.
Our litigation and valuation professionals have many years of experience working with ESOPs. If you have questions or concerns, don’t hesitate to contact a Henry+Horne litigation and valuation professional adviser.
Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV
Director, Litigation+Valuation Services