ESOP Transactions and Purchase of Sale of Employer Stock To And From ESOPs

Summary of Investigation

The attorneys at Block & Leviton are litigating and have previously litigated various issues involving Employee Stock Ownership Plans ("ESOPs") sponsored by closely held companies in connection with potential violations of the federal pension law (ERISA). Joseph Barton, the partner in charge of Block & Leviton’s Employee Benefits Practice, has litigated a number of cases against ESOPs including successfully obtaining a judgment after trial worth more than $17 million on behalf of a class of ESOP participants in the Trachte ESOP. Block & Leviton is interested in examining issues related to cases involving the sale of ESOP stock to sponsoring employers and corporate insiders at prices that may be less than fair market value. Our goal is to evaluate potential litigation that would restore losses to employees and former employees resulting from the purchase or sale of mispriced employer stock by ESOPS.

What is an ESOP?

An Employee Stock Ownership Plan or ESOP is a pension plan or a retirement plan that is invested primarily in employer stock. The ESOP owns shares of stock in the employer; the employee who participates in the ESOP has a beneficial interest in the stock through his/her participation in the ESOP, but does not have any direct ownership or control even though ESOP employers often tell employees that they are “employee owners”. ESOPs are governed by the federal pension law (ERISA) and subject to regulations issued by the Department of Labor and the IRS. They should not be confused with stock option plans, which are frequently not retirement plans. ESOPs are defined contribution or individual account plans, which means that each employee has an account that is assigned shares and the employee’s account rises and falls with the value of the stock.

What are some potential issues with ESOPs?

One issue is the price at which the ESOP purchases the stock, either at the ESOP’s initial formation or as part of “second stage” transaction. One common scenario is the ESOP purchases stock at or near the initial formation of the ESOP at more than fair market value, and as a result also incurs excessive or unnecessary debt which substantially burdens and sometimes threatens the viability of the company. As the effects of an abusive ESOP transaction may not become apparent for some time, it may be wise to have an attorney examine the transaction shortly after it occurs.

A second issue involves the sale of company stock held by the ESOP and the price at which the ESOP stock is sold. A fiduciary of an ESOP probably has a duty to obtain the highest price that a prudent and loyal fiduciary can obtain on behalf of the ESOP, and certainly sell at no less than fair market value. This may not happen if the fiduciary has a conflict of interest, such as selling to corporate insiders (and the fiduciary might be one of the corporate insiders). Additionally, a sale may also trigger voting rights by the participants in the ESOP.

A third issue involves the price at which the ESOP repurchases or redeems the stock after the employees terminate employment. This issue is most likely to arise in a leveraged ESOP – an ESOP that is still paying off debt used to finance the original purchase of the stock. The problem is related to whether the ESOP is properly accounting for the debt when cashing out the shares.

A fourth issue concerns ESOPs that are retroactively amended or changed. A common scenario involves an amendment of the plan to change the time or method of valuing the shares in order to liquidate the shares and distribute the proceeds (i.e. cash employees out of the ESOP) after former employees terminate.

What are the sources of these issues?

ERISA was designed to assure the security of private retirement plans by requiring diversification of pension investments and outlawing self-dealing by the officials who run the plans. But ERISA makes an exception for the purchase and sale of employer stock by ESOPs. ESOPs are allowed to invest up to 100% of their assets in employer stock. Not only can the assets of the ESOPs be undiversified, sometimes there is little effective oversight. In some cases, the same person can be the trustee of the ESOP, and also the CEO and Chairman of the Board (or the Board), and also own shares separate from or sell his/her shares to the ESOP. Even where the trustee is “independent” of the corporate officers, the trustee is usually hired by the corporate insiders, and may be beholden to the insiders. At the same time, the employees have few rights: they have access to few documents, they are usually not provided a say in management or a right to vote, they cannot remove the fiduciaries, and they may not even be told who the fiduciaries are.

Despite these limitations, employees do still have rights. In the case of any purchase or sale, the transaction must occur at a price that is prudently determined to be fair market value. Likewise, the employees have certain contractual or legal rights under ERISA.

Whom to contact for more information

If you are concerned about the management of your ESOP, including as a result of any of the situations described above, we are willing to conduct an initial review at no charge. Our goal would be to evaluate potential litigation that would restore losses to current and former employees of the ESOP. If you have information which might assist us in the investigation of such allegations, please contact one of the following persons:

R. Joseph Barton, Esq. (

Ming Siegel, Paralegal (

Block & Leviton LLP
1735 20th Street NW
Washington DC 20009
(202) 734-7046

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