Courts Almost Always Give Presumption of Prudence For Company Stock in ESOPs
The June 15, 2010 Employee Ownership Update is online and discusses the following:
- Only 141 ESOP Lawsuits Involving Private Companies Reach Court Over 20 Years
- Huawei Now the Second-Largest Employee-Owned Company in the World
- Four Employee Ownership Companies Named Winning Workplaces Winners for 2010; Four More Named Finalists
- Twelve Minutes
The Update discusses ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010, a comprehensive review of ESOP and 401(k) plan litigation over the last 20 years. In their review, the NCEO found that courts have generally given the presumption of prudence for company stock in 401(k) plans and almost always in ESOPs. In fact, they only found 175 ESOP lawsuits (141 in private companies) that reached the courts:
In this review, we found only 141 ESOP cases involving closely held companies (plus 35 involving public companies), not counting a handful we did not include because they deal with issues tangential to current plans. The most important issues in these cases have been valuation, improper distributions, and questions about whether assets should have been diversified.
The review makes it very clear that companies that hire qualified professionals, follow good plan practices, and are not using the ESOP to extract money from the company for the benefit of a few people (often by stretching the law), are very unlikely to be sued, much less lose in court. On the public company front, the review shows that almost all the ESOP cases and about two-thirds of the 401(k) cases have been dismissed at the pleadings stage based on the so-called Moench presumption, which grants a presumption of prudence for investment in company stock, especially if the plan mandates employer securities as an investment. On issues of required disclosure, courts have fairly evenly split over whether fiduciaries must release non-public information.
In addition to the 4-Top Small Company Workplaces and finalists that are ESOP companies that we discussed earlier this week, the Update lists one additional Top Small Company Workplace 2010 that is an ESOP company and three others with alternative employee ownership structures. Top Small Company Workplaces 2010. Here is the bio of the additional ESOP company winner:
Biomark
Boise, Idaho
Founded: 1990
Employees: 22
2009 revenue: $7.9 million
CEO: Dean Park
biomark.com
Makes electronic identification tags for fish and wildlife study.
Because Biomark believes cross-training and variety make for higher job satisfaction, all employees have the opportunity to do fieldwork and get their hands dirty tagging fish and animals. Staff members from the CEO to the customer service reps tag salmon with the staff biologists. When choosing his new company headquarters, CEO Dean Park passed on cheaper options and chose a location to minimize commuting time (and maximize the number of employees able to bike to work).
It also discusses how Huawei, a China-based global provider of telecommunications networks, is now the second largest employee owned company in the world.