Vinoskey reply brief refutes DOL’s stock value and control claims

BVWireIssue #220-1
January 6, 2021

ESOP valuations
control premium, discount rate, expert testimony, breach of fiduciary duty, capitalization rate, fair market value (FMV), employee stock ownership plan (ESOP), adequate consideration

Argument continues in the contentious Vinoskey ESOP litigation, which is now in the 4th Circuit where the remaining defendant, Adam Vinoskey, has appealed the district court’s liability and damages findings. Vinoskey recently filed a reply to the Department of Labor’s defense of the court’s decision in which he discredits the DOL’s valuation-centered contentions.

As we reported earlier, at issue was a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their company to an ESOP for $406 per share. Appraisals in the five years preceding this transaction ranged from $215 per share to $285 per share in 2009. The crux of the district court’s ruling was that Vinoskey was a knowing participant in the independent trustee’s ERISA violations and was liable as a co-fiduciary for failing to remedy the trustee’s breaches. The trustee caused the plan to overpay for company stock, and Vinoskey, the selling shareholder, accepted the price knowing it was inflated.

Post-judgment, the DOL and the trustee settled, but Vinoskey appealed the findings.

Arm’s-length deal: In its response brief, the DOL claimed Vinoskey, who was a named fiduciary of the ESOP, was liable as a fiduciary concerning the 2010 transaction. He also was liable as a co-fiduciary because he failed to make reasonable efforts to remedy the trustee’s breaches. He “did nothing to protect his employees’ interests in the 2010 Transaction.” Vinoskey’s reply brief counters that he removed himself from the decision-making process underlying the transaction and that the company retained an independent trustee that had the authority to review and approve the transaction and that was insulated from Vinoskey’s influence. Vinoskey did “what a prudent fiduciary selling stock to the ESOP should do,” the brief says.

“Vinoskey sat only on one side of the bargaining table and negotiated against the independent trustee, who sat on the other side.” The brief claims he wasn’t a fiduciary and cannot be liable as a co-fiduciary of the trustee’s breaches. The DOL “advances what amounts to a per se theory of liability for selling shareholders when an independent trustee causes an ESOP to overpay for company stock,” the reply brief asserts.

Valuation is forward looking: The DOL claims Vinoskey knew “there was no business reason” that justified the stock price increase from $285 per share in 2009 to $406 per share in 2010. Vinoskey’s reply brief points out that 2009 earnings were lower as a consequence of the Great Recession. It says the DOL conceded that the company began to bounce back in 2010; Vinoskey reasonably believed it would do even better in 2011 considering the large backlog of orders, which, when filled, would boost the company’s earnings.

Valuation is forward looking, the brief notes. “For valuation purposes, the question was whether, in 2010, [the company] was poised for future growth.” Vinoskey saw a promising future particularly in light of the economy’s general improvement.

Regarding the contested issue of control, the brief says a layperson likely understands what “control premium” means. However, “even a valuation professional would not know that a buyer was paying a control premium based solely on the fact that a valuation was conducted on a controlling interest basis,” the brief says. Further, the ESOP did gain control, the brief emphasizes. The transaction caused the ESOP to own 100% of the company’s voting shares, and, under the corporate bylaws, the ESOP had the unfettered right to remove the board of directors for any reason at any time.

The brief further notes that the idea that an ESOP owning 100% of a company’s voting rights might not control the company “simply did not exist until 2017, after the district court’s decision in Brundle.” This transaction took place in 2010, the brief points out.

Stay tuned for reporting on further developments in this case.

Digests of the district court’s 2019 decision in Pizzella v. Vinoskey (earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and Pizzella v. Vinoskey (II), 2020 U.S. Dist. LEXIS 15464; 2020 WL 476669 (Jan. 29, 2020), as well as the court opinions are available to subscribers of BVLaw.

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