ESOP Legal and Fiduciary Update

Transcription

1 ESOP Legal and Fiduciary Update 27th Annual Ohio Employee Ownership Conference April 19, 2013 Thomas Potts Fiduciary Services, Inc Matthew A. Secrist Squire Sanders (US) LLP James G. Steiker SES Advisors, Inc

2 Agenda Recent DOL Complaints and Court decisions affecting ESOPs IRS and DOL rulings and decisions DOL activity and evolving fiduciary standards Impact of the Affordable Care Act 2

3 What s Happening? (Big Picture) Numerous DOL-initiated lawsuits against ESOP fiduciaries following high level of DOL audit activity Some private plaintiff lawsuits against ESOP fiduciaries and other parties to ESOP transactions Malpractice actions against ESOP advisors primarily related to bad tax advice Little new tax or ERISA guidance from IRS or DOL Continuing development of voluntary correction programs 3

4 Recent DOL Complaints Solis v. First Bankers Trust Services, Inc., Maran, Inc., and Maran Employee Stock Ownership Plan (S.D. NY, 11/29/12) Alleges ESOP overpaid for stock because ESOP valuation unreasonably relied upon aggressive growth projections prepared by Company advisors, did not properly discount for the Company s dependence on Wal-Mart, and used inappropriate comparable companies Solis v. First Bankers Trust Services, Inc., Frank Firor, and Rembar Employee Stock Ownership Plan (S.D. NY, 11/28/12) Alleges ESOP overpaid for stock because ESOP valuation ignored replacement cost of departing CEO, applied too high a control premium, and relied upon an inappropriate capital structure assumption 4

5 Recent DOL Complaints Solis v. Webb, et.al. (N.D. CA, April 25, 2012) Alleges ESOP overpaid for stock because valuation firm ignored $12mm deferred compensation liability owed by company and other valuation defects Solis v. First Bankers Trust Services, Inc., Dipano, & SJP Group, Inc. Employee Stock Ownership Plan (D.NJ, July 7, 2012) Alleges ESOP overpaid for stock because valuation firm used over-aggressive projections and did not anticipate real estate downtown Solis v. GreatBanc Trust Company, Sierra Aluminum Company and The Sierra Aluminum Company Employee Stock Ownership Plan (C.D. CA, September 28, 2012) Alleges ESOP overpaid for stock based on aggressive projections, improper discount for seller notes, unreasonable view of capital expenses and projected growth 5

6 Recent DOL Cases Solis v. Webb, (N.D. CA, 2012) Directed trustees and company officers subject to fiduciary liability where they had direct knowledge of other fiduciary s breach Harris v. Greatbanc Trust Co., (C.D. CA, 2013) Indemnification of fiduciary in advance of final judgment by 100% ESOP-owned company permitted under ERISA and not improprer use of plan assets 6

7 Recent Private Plaintiff Decided Cases Chesmore v. Alliance Holdings, Inc. (W.D. Wisc. 2012) Court found Trustee and officer of ESOP holding company liable for prohibited transaction and self-dealing based upon spin-off of subsidiary for more than adequate consideration and significant bonus for accomplishing transaction Coulter v. Morgan Stanley & Co., (S.D. NY 2013), In re GlaxoSmithKline, 2012, In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011), Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11 th Cir. 2012), Schmalz v. Sovereign Bancorp, Inc., 868 F. Supp. 2d 438 (E.D. PA 2012), contra. Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410 (6 th Cir. 2012) Stock drop cases where court found presumption of prudence and no fiduciary liability for failure to sell employer stock during downturn 7

8 Recent Private Plaintiff Decided Cases (cont.) Enneking v. Schmidt Builders Supply Inc. (D.C. KA, 2013) Statute of limitations extended past six years if fraud or active concealment of fiduciary breach Kronzer v. Hintz (9 th cir. 2012) Participation of fiduciary as individual in sale transaction does not create new right to information about the company and the fiduciary s action absent allegation of fiduciary breach Sexton v. Panel Processing, Inc. (E.D. Mich. 2012) Employee terminated after threatening to report ERISA violation not whistleblower protected by statute unless actual report or governmental action 8

9 Recent Private Plaintiff Decided Cases (cont.) Rodgers v. Mattingly Foods, Inc. (S.D. OH, 2013) ESOP participants permitted to bring shareholder derivative action against company officers in state court 9

10 Malpractice Actions Olson v. Sovereign Bancorp, Inc., (D.C. Mass. 2012) Potential investment custodian liability for botched 1042 investment Undisclosed Malpractice action settled against law firm and accounting firm for botched 1042 investment Antioch Litig. Trust v. McDermott Will & Emery LLP, (S.D. OH. 2013) 2009 claims regarding 2003 transaction time-barred under Ohio malpractice statute of limitations 10

11 DOL Proposed Fiduciary Definition Regulation Proposed by DOL on October 22, 2010 Public hearing March 1 st and 2 nd, 2011 DOL received hundreds of public comments Withdrawn September 19, 2011 Originally expected to be reissued in 2012 Now expected to be reissued in July 2013

12 DOL Proposed Fiduciary Definition (cont.) Advisory Opinion 76-65A Prior to October 22, Valuation of securities alone is not considered as rendering investment advice. October 22, 2010 Proposed Regulation s Preamble Incorrect valuations are a common problem identified by the DOL in the ESOP Enforcement Project. Proposed Regulation is intended to supersede Advisory Opinion 76-65A.

13 DOL Proposed Fiduciary Definition (cont.). 29 CFR (c)(1): Except as provided in paragraph (c)(2) of this section, a person renders ``investment advice'' for a fee or other compensation, direct or indirect, to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, if: (i) Such person-- (A)(1) Provides advice, or an appraisal or fairness opinion, concerning the value of securities or other property,

14 29 CFR (c)(2), Limitations: DOL Proposed Fiduciary Definition, cont. For purposes of this paragraph (c), a person shall not be considered to be a person described in paragraph (c)(1) of this section with respect to the provision of advice or recommendations if, with respect to a person other than a person described in paragraph (c)(1)(ii)(a), such person can demonstrate that the recipient of the advice knows or, under the circumstances, reasonably should know, that the person is providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property, or as an agent of, or appraiser for, such a purchaser or seller, whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial investment advice.

15 Notable Public Comments ESOP Association: IRC Section 401(a)(28) requires appraisers to be independent. 29 CFR requires the independence of an appraiser as a condition to prohibited transaction exemption. Costs would be prohibitive. Focus on education of appraisers instead.

16 Notable Public Comments, cont. National Center for Employee Ownership: Conducted a review of litigation over employer stock in defined contribution plans between 1990 and court cases filed on these issues, 141 of which involved private companies Of these 141 cases, only 17 concerned valuation

17 American Society of Appraisers: Notable Public Comments, cont. Fiduciary approach is inconsistent with the appraisal reform policies of other federal agencies. Uniform Standards of Professional Appraisal Practice (USPAP). Potential ethics conflict with USPAP. Other comments can be accessed at

18 Senator Kelly Ayotte s Senate Bills June 20, 2011 introduced Senate Bill 1232 Would have modified the definition of fiduciary under ERISA Section 3(21) to exclude ESOP appraisers. Co-sponsored by Senators Olympia Snowe (R-ME), Susan Collins (R- ME), Scott Brown (R-MA), and Mary Landrieu (D-LA). Read twice and referred to the Committee on Health, Education, Labor, and Pensions. February 10, 2013 introduced Senate Bill 273 Would have modified the definition of fiduciary under ERISA Section 3(21) to exclude ESOP appraisers. Co-sponsored by Senators Roy Blunt (R-MO), Mary L. Landrieu (D-LA), and Mitch McConnell (R-KY). Read twice and referred to the Committee on Health, Education, Labor, and Pensions.