In a notable ESOP case, the court recently dismissed allegations that the defendants had committed breaches of fiduciary duties and engaged in a prohibited transaction. The defense expert made a persuasive showing that “no more than fair value market value was paid for the non-ESOP shareholders’ stock,” the court decided.
Here’s the deal: At issue was a 2003 transaction by which the subject company (Antioch) bought all of the outstanding shares of its stock held outside its employee stock ownership plan. The purchase was part of a tender offer transaction that left the company 100% ESOP-owned. The defendants, who then served on the company’s board of directors and/or the internal ESOP advisory committee, held non-ESOP shares and initiated the transaction. In late 2008, the company declared Chapter 11 bankruptcy.
The plaintiffs were plan participants who claimed the defendants’ actions ultimately caused the ESOP’s shares of Antioch stock to become worthless. To distance the defendants from the process, the company had retained an independent trustee that relied on opinions from Duff & Phelps as to whether the transaction was fair to the ESOP from a financial point of view.
At trial, both parties presented high-caliber experts to assess D&P valuation-related work, including analysis of the company’s financial position, industry research, and discounted cash flow analyses. In terms of the latter, sticking points were D&P’s financial forecasts and its accounting for company-specific risk.
The plaintiffs’ expert asserted D&P overvalued the company. In contrast, the defense expert said his independent analysis showed that all aspects of D&P’s work were “sound and customary.” He presented a detailed critique of the opposing expert’s opinion, noting it ignored the strength of the company and failed to indicate in the record where D&P’s projections were unreasonable.
Crediting defense expert testimony, the court ruled D&P’s fairness and valuation opinions were “reasonable and appropriate” and absolved the defendants of any liability. The opposing expert’s valuation opinions were unsound and driven by hindsight, the court concluded.
The case is Fish v. Greatbanc Trust Co., 2016 U.S. Dist. LEXIS 137351 (Sept. 1, 2016). A case digest and the court’s opinion will be available at BVLaw soon.
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