September 24, 2021

The Federal District Court for Hawaii recently determined that no violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) were established by the U.S. Department of Labor (“DOL”) in a breach of fiduciary duty action it brought against an ESOP plan sponsor, its board of directors and the selling shareholders. (Walsh vs. Bowers, Civil No. 18-00155 SOM-WRP (D. Hawaii Sept. 17, 2021)

The case involved a transaction that closed in December 2012 in which an employee stock ownership plan (“ESOP”) established by the plan sponsor purchased all of the outstanding shares of stock of the plan sponsor from the shareholders for $40 million.  The selling shareholders received written promissory notes from the ESOP that were guaranteed by the plan sponsor. 

Following the transaction, the DOL alleged that the ESOP overpaid for the stock and further alleged a breach of fiduciary duty by each of the ESOP’s trustee and the plan sponsor’s board of directors. Finally, the DOL alleged that the ESOP and the selling shareholders were involved in a non-exempt prohibited transaction.

After a 5-day trial, the Court determined that no ERISA violations had been established by DOL.  The Court analyzed the compelling expert testimony on valuation of the stock purchased by the ESOP as well as the process followed by the ESOP’s trustee in connection with the transaction. The Court determined that DOL had not established that the ESOP overpaid for the stock and that the Plan sponsor board of directors had not breached their fiduciary duties under ERISA.  (The ESOP trustee settled with DOL prior to the trial).

Polsinelli shareholder Gregory Brown testified as a fiduciary process expert on behalf of the defendant directors and selling shareholders, together with valuation experts engaged by the trial defense law firm, contributing to the victory for the defendants.