Ritchie Trucking Service Inc. has reached a $1.9 million settlement in a class action suit with participants in its employee stock ownership plan (ESOP). Plan participants had filed suit against Ritchie in the U.S. District Court for the Eastern District of California after a 2018 transaction transferred company ownership to the ESOP. The plaintiffs claimed that the transaction overvalued company stock, thus causing the ESOP to pay more than fair market value for the stock and harming the retirement accounts of plan participants.
The settlement in this case highlights the legal scrutiny given to ESOP-related transactions in light of the significant legal risks associated with transferring company stock to employee ownership. It also emphasizes the necessity of upholding fiduciary standards under the Employee Retirement Income Security Act (ERISA).
According to the ESOP participants, Ritchie conducted the 2018 ownership transaction at an inflated valuation without taking appropriate measures to protect the interests of plan participants. In doing so, the plan participants claimed that the plan fiduciaries breached their duties under ERISA, specifically, the duties of diligence, prudence, and loyalty in managing retirement assets for employees.
More specifically, the plaintiffs criticized the roles of advisors to the transaction in their complaint, including the trustee responsible for approving it. They alleged that the trustee failed to adequately investigate the valuation of the stock transferred in the transaction and the effects of the ESOP's debt from the transaction on plan participants. They also accused corporate stakeholders of unfairly benefiting from the transaction.
The settlement prevents Ritchie Trucking from admitting any liability for its actions and avoids years of unresolved litigation. The settlement is valued at $1,885 million, which consists of a $485,000 cash payment to the class, comprising approximately 173 plan participants between 2018 and 2024. The settlement also decreases the debt that the ESOP owes for purchasing company stock by $1.4 million. The settlement represents an estimated 21 – 30% of the plaintiffs' maximum potential damages, which is a significant recovery in ESOP litigation.
The Ritchie settlement is only one in a significant lien of ESOP-related lawsuits that underscore the dangers of employee ownership transitions, particularly when corporate insiders stand to benefit from setting the valuation terms of company stock. This case stresses the need for companies considering ESOP structures to carefully consider various factors, including transparency, extensive and thorough documentation, and the strict observance of fiduciary duties by all parties involved.
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