A federal judge has ruled that Wilmington Trust owes Employee Stock Ownership Plan participants nearly $30 million as a result of a stock-purchase that violated the Employee Retirement Income Security Act of 1974. The defendant agreed to pay $29,773,250, according to the memorandum filed March 13 in the U.S. District Court for the Eastern District of Virginia.
District Judge Leonie M. Brinkema ruled that the defendant engaged in a prohibited transaction by fialing to ensure that the ESOP paid no more than adequate consideration for the stock in Constellis and, as a result, damaged the ESOP by agreeing to overpay for the stock.
Gregory Porter, of Bailey & Glasser, said the decision lays out important new guidance for ESOP trustees on many valuation issues. “Two [issues] stand out,” Porter said. “First, the court held that valuation firms and the trustees cannot blindly accept management projections but must scrutinize projections for consistency with past projections and evaluate the self-interest of managers making the projections. Second, the court held that it was improper for the ESOP to pay a control premium when the selling shareholders retained control of the board of directors; instead, the ESOP should have received a discount for lack of control. Both are common problems in ESOP transactions.”