The National Center for Employee Ownership (NCEO) also filed an amicus brief in which it supports the dismissal of the Lee case that is currently on appeal with the 4th Circuit. NCEO says it seeks to “clarify[] what the available data show with respect to employee ownership so that the Court and its members can evaluate party litigation positions in the context of reliable information.”
The NCEO brief discusses the extensive academic research that has shown the advantages employees have received from participating in an ESOP plan, even in comparison with other retirement programs, such as 401(k) plans. The NCEO disputes the claim by the amicus curiae supporting the plaintiff, the Pension Rights Center (PRC), that ESOPs carry enormous risks for employees and are “vulnerable to abuse.” These are “unsubstantiated statements” that undermine the bipartisan Congressional efforts to encourage employee ownership, the NCEO says.
‘Conflating’ enterprise with equity value: According to the NCEO, the Lee plaintiff “mischaracterizes” the contested stock acquisition by “conflating enterprise value with equity value” when arguing the ESOP overpaid for company stock where the purchase price for the acquired stock was $198 million and a valuation that was done less than a month later valued the stock at $64.8 million.
“Where, as here, the ESOP uses debt financing to purchase company stock, the purchase price, which is based on the subject company’s enterprise value and capital structure prior to the transaction, is independent of the debt financing decision,” the NCEO explains. Adjusting for the debt would be inappropriate, the brief says. “Indeed … it would frustrate the fair market value standard that is generally applicable to ESOP stock purchase transactions.” No willing seller “not under any compulsion to sell” would agree to a lower purchase price to account for the debt burden to the buyer, the brief notes. In contrast, the equity value represents the value of the purchased equity less the transaction debt. In this case, the brief notes, the district court understood the difference, but the plaintiff did not. As happened in this transaction, “achieving an equity value greater than $0 within a short period of time after the transaction closing is an indicator that the purchase price was not only consistent with the fair market value standard, but also favorable to the buyer,” the NCEO brief says.
The NCEO brief accuses the plaintiff of attacking “the core concepts of ESOPs and ESOP stock purchase transactions.” Research has shown that ESOPs have been “strikingly successful” in enabling employees to build wealth, the NCEO says. DOL data show that ESOPs have “slightly” outperformed 401(k) plans in terms of rates of return and have had lower volatility. A 2017 research report sponsored by the DOL showed that, among workers sampled, those who participated in an ESOP had a 92% higher median household net wealth, 33% higher income from wages, and 53% longer median job tenure relative to workers who were not participants in an ESOP.
ESOPs consistently have received “Congressional blessing,” the NCEO brief says, as members of Congress have seen the data favoring employee ownership in companies.
The 4th Circuit Court of Appeals should “reject any negative presumption regarding ESOPs, should recognize what the figures alleged in the Complaint truly reflect about the prudence of the stock purchase transaction, and should affirm the judgment of the district court,” the NCEO brief says.
Stay tuned for further updates on this case.
A digest of the district court’s ruling in favor of the defendants in Lee v. Argent Trust Co., 2019 U.S. Dist. LEXIS 132066 (Aug. 7, 2019), and the court’s opinion, are available to subscribers of BVLaw. Digests for Brundle v. Wilmington Trust N.A., 241 F. Supp. 3d 610 (E.D. Va. 2017); Brundle v. Wilmington Trust N.A., 258 F. Supp. 3d 647 (E.D. Va. 2017); and Brundle v. Wilmington Trust N.A., 919 F.3d 763 (4th Cir. 2019), and the courts’ opinions also are available at BVLaw.