United States: District Court Rules On ERISA Liability Of Board And ESOP Advisory Committee Members In ESOP Transactions

Lynn Calkins is a Partner and Jessica Farmer is an Associate in Holland & Knight's Washington D.C. office
Louis Joseph and Renee Lewis are Senior Counsel in Holland & Knight's Chicago office


  • A U.S. District Court ruling held that members of a corporate board of directors and an internal employee stock ownership plan (ESOP) advisory committee did not breach their fiduciary duties in connection with an ESOP transaction for a company that ultimately declared bankruptcy.
  • The lengthy decision in Fish et al. v. GreatBanc Trust Company et al. not only provides a detailed view of the inner workings of an ESOP transaction, evaluated by testimony from numerous expert witnesses, but also gives validation to the importance of using thorough, well-documented processes at every step in an ESOP transaction.

On Sept. 1, 2016, the U.S. District Court for the Northern District of Illinois issued its decision in the Antioch employee stock ownership plan (ESOP) fiduciary litigation. The court held that the Antioch Board of Directors and ESOP Advisory Committee did not breach their fiduciary duties in connection with the 2003 transaction through which Antioch became a 100 percent ESOP-owned company. The lengthy decision not only provides a detailed view of the inner workings of an ESOP transaction, evaluated by testimony from numerous expert witnesses, but also gives validation to the importance of using thorough, well-documented processes at every step in an ESOP transaction.

In the case of Fish et al. v. GreatBanc Trust Company et al., Case No. 1:09-cv-01668, the District Court heard 34 days of trial testimony. The plaintiffs were employees of the closely held Antioch Company who had participated in Antioch's ESOP. The plaintiffs' claims arose from a buy-out transaction at the end of 2003 in which Antioch borrowed money to redeem all of its stock (except stock already owned by the ESOP), resulting in Antioch becoming a 100 percent ESOP-owned company. Five years later, Antioch declared bankruptcy. The plaintiffs sued members of Antioch's ESOP Advisory Committee and Board of Directors, alleging corporate breaches of fiduciary duties in connection with the buy-out. The plaintiffs also sued GreatBanc Trust Company, the independent trustee of the ESOP, but the claims against GreatBanc were settled in advance of trial.

The plaintiffs' sweeping claims asserted violations of Sections 404, 405 and 406 of ERISA, challenging the actions taken by the independent trustee as well as the actions taken (and not taken) by individual members of the board and the committee. In a 131-page decision, the court analyzed each of the plaintiffs' claims in light of the facts presented and found in all cases that the members of the board and the committee had no liability and that GreatBanc had not breached any fiduciary duties.

Section 404 Claims

To assess the claims against the members of the board and the committee for purported breaches of the duties of loyalty and prudence under Section 404, the court took a two-step approach: First, the court considered whether the defendants were ERISA fiduciaries for purposes of the transaction. Second, the court considered whether those individuals breached any fiduciary duty.

On the initial point, the court noted that while the ESOP plan document named the committee members as fiduciaries, it also provided that those members did not have any fiduciary duties with respect to the redemption transaction. Instead, under the terms of the ESOP plan document, GreatBanc was designated as the independent trustee, and, as such, GreatBanc and not the committee had the authority to make the decisions relating to the transaction. The court also found that the actions the committee members did take to aid the progress of the transaction (e.g., communicating with participants and amending the ESOP's distribution policy) were ancillary, non-fiduciary actions – insufficient to confer fiduciary status for a Section 404 claim. Ultimately, the court stated that it did not need to decide whether the defendants had a fiduciary duty in connection with the transaction, because, as discussed below, even if they had such a duty, they did not breach it.

On the question of fiduciary breach, the court found that it was clear, based on the "voluminous evidence" presented, that the defendants did not breach any fiduciary duties. The opinion examined two areas of alleged breach: 1) breach of the duty to monitor the trustee; and 2) breach of the duty to inform co-fiduciaries of material information.

The court found that the committee members did not have a duty to monitor the trustee, because they did not have the power to appoint or remove the trustee. Rather, the court concluded that the duty to monitor the independent trustee rested with the board, which did have the power of appointment and removal.

The court then analyzed whether the board had breached its duty to adequately monitor the independent trustee. As a threshold matter, the court noted that there was disagreement about whether one must first prove that the independent trustee breached its fiduciary duty in order to make a case that the board breached its duty to monitor that trustee. However, the court mooted that question by concluding that GreatBanc did not breach its duty. Specifically, the court found that the independent trustee hired top financial and legal advisors, conferred numerous times with its advisors, carefully scrutinized the advisors' conclusions and advice, and then reached its own decision regarding the prudence of the transaction. The court also found it persuasive that the independent trustee negotiated vigorously with Antioch and zealously advocated on the ESOP's behalf.

As support for their arguments of fiduciary breach by the trustee, the plaintiffs, through their trial expert, raised several criticisms of the fairness opinion and the underlying financial analysis provided by the independent trustee's financial advisor. However, these arguments were not persuasive. Based on the facts presented, the court found that the independent trustee followed its process for analyzing the work product provided by its financial advisor, and that the differences between the plaintiffs' expert's views and those of the independent trustee's financial advisor represented nothing more than reasonable differing opinions about the financial information and assumptions made. Where there are simply "two reasonable and skilled analysts making a different judgment," no breach of any ERISA-based fiduciary duty of prudence would be found.

The court then assessed the plaintiffs' claim relating to failure to monitor, concluding that there had not been any breach of the board's duty to monitor the independent trustee. Pointing to the opinions of defendants' expert, Greg Brown, the court found that two meetings between the board and the independent trustee, as well as frequent communications between board members and the independent trustee, were sufficient to provide the board with a "foundational understanding of the nature of GreatBanc's responsibilities, a basic understanding of the work performed by GreatBanc, and an awareness that GreatBanc was acting in the best interests of the ESOP participants." The court rejected the plaintiffs' assertions that the board was required to take a more active role, noting that the trustee must remain independent and that the board cannot inject itself into the independent trustee's decision-making process.

Although ERISA is silent regarding the existence of a duty to inform, plaintiffs argued that the fiduciary duties of loyalty and prudence required the defendants to inform all co-fiduciaries of any information material to the actions being taken on behalf of the ESOP. The plaintiffs argued that several items that developed immediately prior to the closing of the transaction should have been provided to GreatBanc, including: 1) downside feasibility scenarios and a sensitivity analysis; 2) a pre-transaction plan amendment and change to the ESOP distribution policy; 3) a revised repurchase obligation study; and 4) an updated business plan. The court ultimately concluded that, even assuming that a duty to inform exists under ERISA (the court characterized the defendants' arguments that no such duty exists under ERISA as "strong"), plaintiffs failed to prove that the purportedly missing information would have caused GreatBanc to stop the transaction or renegotiate any of its terms.

Section 405 Claim

In assessing the plaintiffs' claims of co-fiduciary liability under ERISA Section 405, the court determined that there were derivative claims premised upon a breach by the independent trustee, and that the plaintiffs failed to demonstrate any underlying breach by GreatBanc.

Section 406 Claim

Finally, the court assessed the plaintiffs' prohibited transaction claims under Section 406 of ERISA. The plaintiffs alleged that Antioch's redemption of the shares held by shareholders other than the ESOP constituted either an indirect sale or exchange between the ESOP and a party in interest within the meaning of Section 406(a)(1), or a use of plan assets for the benefit of a party in interest within the meaning of Section 406(a)(1)(D). Declining to decide whether either of these provisions were applicable to the corporate stock redemption transaction, the court concluded that, even if these provisions of ERISA did apply, because Antioch purchased the outside shareholders' stock for "adequate consideration" within the exemption of Section 408(e), the defendants could not be liable for causing a prohibited transaction under Section 406. Ultimately, the court determined that Antioch paid fair market value for the non-ESOP shareholders' stock, and that the fair market value was determined in good faith by the independent trustee in reliance upon the advice and opinions of its financial expert, which the independent trustee properly analyzed.

Key Takeaways

  • Being designated as a named fiduciary in the plan document is not dispositive of whether one can be liable under ERISA as a fiduciary with respect to a particular transaction.
  • Communications between an ESOP advisory committee and plan participants regarding a proposed transaction and an amendment to the plan's distribution policy do not necessarily confer fiduciary status for an ERISA Section 404 claim. In this case, they were ancillary, non-fiduciary actions relating to a transaction for which the committee members had no discretionary authority.
  • ESOP advisory committee members do not have a duty to monitor the independent trustee if the committee does not have the power to appoint or remove the independent trustee.
  • An independent trustee was found to have fulfilled its ERISA Section 404 fiduciary duties when, in connection with a corporate redemption of non-ESOP held shares, the independent trustee 1) hired top financial and legal advisors; 2) met with and scrutinized the conclusions of those advisors and of the company; and 3) advocated vigorously on the ESOP's behalf.
  • A claim that an independent trustee breached its ERISA Section 404 fiduciary duties cannot be substantiated solely because two skilled financial advisors differed in their analyses of the financial condition of the company.
  • A company's board of directors cannot inject itself into the decision-making process of an independent trustee, but it can satisfy its duty to monitor an independent trustee by engaging in sufficient meetings and communications with the independent trustee so that the board is aware 1) of the actions being taken by and the responsibilities of the independent trustee; and 2) that the independent trustee is acting in the best interests of the ESOP participants.
  • To prove a corporate board violated any duty to inform (assuming that such a duty even exists), plaintiffs must demonstrate that omitted information would have caused an independent trustee to stop a transaction or renegotiate its terms.
  • A claim of co-fiduciary liability against a plan fiduciary under ERISA Section 405 cannot succeed where the independent trustee responsible for the transaction did not breach its own fiduciary duty.
  • There is no prohibited transaction with respect to a corporate redemption of non-ESOP shareholders if no more than adequate consideration is paid for the redeemed shares.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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