ESOP Dangers Summarized

A recent U.S. Court of Appeals for the Seventh Circuit case, Fish v. GreatBanc Trust Co., shows the dangers of ESOPs.  The majority family owners of The Antioch Company sold their remaining 57 percent stake to the ESOP (the ESOP already owned 43 percent) at a relatively high price.  As part of the deal, the put option rights of participants were expanded.  A temporary trustee, GreatBanc Trust Co., was retained.  It hired Duff & Phelps to produce a fairness opinion.  Shortly after the deal, many participants cashed out their benefits, and a cash crunch ensued.  Antioch filed bankruptcy a few years later.  Participants lost their jobs and their ESOP benefits were worthless.  The defendants filed a motion for summary judgment, claiming the statute of limitations had run on filing a claim because the employee plaintiffs had actual knowledge of a breach of fiduciary duty more than three years prior to filing their claim.  The District Court agreed.  The Seventh Circuit reversed.  It held that the plaintiffs lacked the information necessary to determine whether a breach of fiduciary duty had occurred at the time of filing suit, because they lacked the ability to analyze the process undertaken by the fiduciaries.  The case now proceeds.  Interestingly, the Court stated:  “The evidence here could support a finding that Duff & Phelps failed to perform an independent assessment because it simply accepted Antioch’s July 2003 assumptions regarding the company’s projected repurchase liability.”  (Many large ESOPs use the services of Duff & Phelps.)  What’s somewhat odd:  In many of the cases alleging breach of fiduciary duty (including those relating to company stock), the courts throw out the case early on in response to a motion to dismiss, based on a determination that alleged facts are based on conjecture.  Query how a fiduciary’s actions can be determined without discovery (that cannot be conducted if a case is dismissed without discovery)?  In many cases, injustice exists.  But, case loads are reduced.