One question that has been on the minds of plan sponsors is how aggressive the Department of Labor (DOL) under President Trump will be compared to that of President Obama. In recent years, the DOL made a priority of investigating ERISA fiduciary issues, with a particular focus on employee stock ownership plans (ESOPs). After the DOL delayed the effective date of the ERISA fiduciary rule, some commentators speculated as to whether the DOL would scale back its priority on reviewing and auditing ESOPs. A recently filed case (), however, suggests that the DOL may continue to make a priority out of investigating potential abuses in ESOP transactions. As such, employers who are considering the adoption of the ESOP should be mindful of putting together an experienced team to guide them through the fiduciary issues. In particular, it is critical for the trustee of an ESOP to hire an independent appraiser that has not performed a preliminary ESOP feasibility study for the company, and the trustee and other fiduciaries of the ESOP should be engaged with the due diligence process.

As background, ERISA fiduciaries have a duty to act solely in the best interest of plan participants and beneficiaries. With respect to ESOPs, this duty requires that the trustee of the ESOP trust engage an independent appraiser to determine the value of the shares of the company, and that the trust pay no more than fair market value for those shares from the sellers. In its complaint, the DOL alleges that Reliance Trust Company, Inc. (the trustee), who was the trustee of the ESOP at issue, breached its fiduciary duties and caused the ESOP trust to overpay for shares of Tobacco Rag Progressors, Inc. (the company), the sponsor of the ESOP. In particular, the DOL alleges that the trustee made the following critical errors:

  • The trustee engaged Willamette Management Advisors (the appraiser) as its independent appraiser and financial advisor, but this independence was compromised because the company previously engaged the appraiser to perform a preliminary valuation of the company as part of an ESOP feasibility study.
  • Related to the first point, the trustee engaged in limited negotiations with the selling shareholders of the company over the price of the shares to be purchased. The complaint alleges that the selling shareholders’ initial offer was $105 million. The trustee’s initial counteroffer was $103 million, and the parties settled at $104 million. That might seem logical considering that both the trustee and company used the same appraiser to determine the value of the shares, but that was the rub. From the DOL’s perspective, the fact that the appraiser essentially was reviewing its own work was precisely the problem.
  • The trustee was not fully engaged in the due diligence process. Especially given the perceived lack of independence from the appraiser, the DOL felt that the trustee should have demonstrated that it reviewed the information and assumptions underlying the valuation report and asked meaningful questions in order to test the conclusions of the appraiser. The DOL is alleging that the trustee failed to do these things.

In one sense, this complaint is unremarkable because the DOL has been filing similar complaints over similar issues for the past several years. Yet, this complaint is remarkable for two other reasons. One is that this case demonstrates the continued importance of following the process set forth in the GreatBanc Trust Company (GreatBanc) settlement agreement from 2014. That settlement set forth a series of procedural requirements that ESOP fiduciaries and appraisers should follow when establishing an ESOP to demonstrate that they satisfied their fiduciary duties. Indeed, fiduciary compliance often is much more a matter of process than anything else. Although these specific procedures were binding only on GreatBanc, the DOL has been applying these standards to other transactions as well (and in this case, to a transaction that took place in 2010- 4 years before the settlement!).

The second noteworthy item from this complaint is that it is the first such complaint with the new DOL Secretary Alexander Acosta named as the plaintiff. That suggests that the DOL may continue to make these types of cases a priority.

A key message is that it remains critical to engage a well-qualified and experienced team to establish an ESOP. There are many reasons why an ESOP could be a good fit for a company, but the ESOP’s success depends on the team (trustee, appraiser, attorneys and other advisors) establishing the ESOP and administering the ESOP. If anyone had any thoughts that the new administration would allow for a more relaxed attitude towards ESOP, this complaint seems to indicate the contrary.