Jenner & Block

Fourth Circuit Affirms $30 Million in Trustee Liability for Overvalued ESOP

The private plaintiff and governmental attack on employee stock ownership plans (ESOPs) was given energy recently, as the United States Court of Appeals for the Fourth Circuit affirmed a trustee’s breach of ERISA fiduciary duties in causing the Constellis Group ESOP to overpay for the company stock purchased in a transaction by almost $30 million.  In Brundle on behalf of Constellis Employee Stock Ownership Plan v. Wilmington Tr., N.A., 919 F.3d 763 (4th Cir. 2019), as amended(Mar. 22, 2019), Constellis, a privately held company, retained CSG International (CSG), an investment banking firm, to explore the possibility of creating an ESOP to purchase Constellis.  Id. at 771.  CSG proposed a “unique” ESOP structure where Constellis’ owners (the Sellers) would retain de facto control of Constellis by selling 90 percent of their shares to the ESOP and exchange the remaining 10 percent for “equity-like warrants” that would entitle the Sellers to buy back equity at a designated price and guarantee the Sellers a majority on Constellis’ board of directors. Id.  The proposed ESOP would maximize after-tax cash returns to the Sellers if completed by the end of the calendar year. Id.

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