Employee Stock Ownership Plans (ESOPs)
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ESOP Litigants Play by Their Own Valuation Rules

Imagine if you were playing on a baseball team and the opposing players argue that you are violating the rules of soccer. That’s what it’s like when private parties and the Department of Labor (DOL) challenge Employee Stock Ownership Plan (ESOP) valuations. Plaintiffs play a very different valuation ballgame, which confounds experts who go up against them in a dispute involving allegations that an ESOP paid more than “fair market value” for stock of the sponsor company. In a recent webinar, McDermott attorney Richard Pearl discussed valuation concepts and some fundamental issues under the Employee Retirement Income Security Act. Read more.

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More Caring: New CARES Act Guidance for Retirement and Nonqualified Plans

New Internal Revenue Service (IRS) guidance expands the availability of Coronavirus Aid, Relief and Economic Security Act (CARES Act) distributions and loans under eligible retirement plans, and it provides important clarifications regarding how to administer and report CARES Act distributions and loans. The guidance also provides welcome relief for a participant who receives a CARES Act distribution, allowing the participant to revoke an otherwise irrevocable salary deferral election under a nonqualified deferred compensation plan. Finally, consistent with prior guidance, the new IRS guidance confirms that CARES Act provisions are optional, meaning that plan sponsors may choose whether to implement CARES Act changes. Access the full article.

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Investor Guidelines for Shared Value Creation in Employee Ownership Transitions Unveiled

One of the big questions for the employee ownership field is, why has the number of US employee-owned firms failed to grow significantly over the last couple of decades? An upcoming paper from Fifty by Fifty proposes that the barrier to growth is a lack of agency. Employees don’t have the knowledge, skills or capital to pursue a buyout of their employer; and employers, knowing little about the benefits of selling to employees, are more likely to respond to an opportunity that knocks on their door, such as an offer from a private equity firm or a strategic buyer. McDermott’s Ted Becker and Erin Turley share their thoughts on the guidelines in a recent article published on Medium. Access the full article. Originally published on Fifty by Fifty, January 29, 2020

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Federal Court Dismisses Challenge to ESOP Transaction

In Lee v. Argent Trust Co., the court dismissed ERISA claims challenging an ESOP stock transaction because the plaintiff, who “fundamentally misunderstands the nature of the” ESOP transaction, did not allege that she suffered any injury. This decision is important to educate other courts about economics, particularly in cases where plaintiffs rely on little more than the post-transaction valuation as evidence of supposed overvaluation. Access the full article.

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Kruse-Western Wins Partial Dismissal in ERISA Lawsuit over $244 Million Stock Sale

The federal court affirmed ERISA’s limitations on the types of claims and remedies available under ERISA. This well-reasoned decision affords Congress the deference it deserves by limiting claims and remedies only to those Congress intended to provide in ERISA. Access the full story.

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On Top of ESOP Developments: Insights from the 42nd ESOP National Conference

The 2019 ESOP National Conference, an annual gathering for employee owners from all levels, association volunteer leaders and expert professionals, took place May 22–24. Two McDermott partners, Theodore (Ted) M. Becker and Erin Turley, presented three sessions during the conference, the slides of which are available for download on the conference website. See descriptions of the presentations below: New & Notable ESOP Valuation Issues Co-Presented by Erin TurleyESOP valuation methodology and theory continue to evolve in part due to ESOP litigation, DOL investigations, academic studies and other outside factors that may potentially impact ESOP valuations today. This advanced valuation session discussed recent "hot topics" to consider when valuing an ESOP company. Legislative, Regulatory and Judicial Update Moderated by Ted BeckerThis session provided an update of court decisions, IRS and DOL guidance and activities, and federal legislation of significance...

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It Could Happen to You: Tips for Acing a Benefit Plan Audit

Over the past several years, the IRS and DOL have significantly increased the number of benefit plans audits conducted each year. As a result, it is important for plan sponsors to understand the types of issues that often arise in connection with such audits. At the recent PSCA 2019 National Conference, Brian Tiemann explained what plan sponsors should expect if their benefit plan is selected for audited. More specifically, Brian discussed the ways audits are typically triggered and how to respond when a plan is audited. In addition, Brian outlined some of the most common retirement and health and welfare compliance issues identified in plan audits. He also discussed how plan sponsors can prepare for audits and even address potential compliance issues before they occur. View the full presentation.

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US Supreme Court to Review Unusual Second Circuit Decision in Stock Drop Case Against IBM

On Monday, the US Supreme Court agreed to review the Second Circuit’s decision in Jander v. Retirement Plans Committee of IBM, a “stock drop” lawsuit against IBM’s benefit plan fiduciaries. The Second Circuit’s decision marked one of the few times a federal court permitted a “stock drop” lawsuit to survive dismissal since the Supreme Court’s decisions in Fifth Third Bank v. Dudenhoeffer (2012) and Harris v. Amgen (2016). Together, the Dudenhoeffer and Amgen decisions set a high pleading bar for plaintiffs who file “stock drop” claims. These lawsuits involve employee stock ownership plans, in which the plan includes employer stock as an investment option, and a subsequent drop in that stock’s price. Plaintiffs allege that by failing to remove the stock from the plan or take other corrective action (such as disclosing information), fiduciaries breached the prudent person standard of care that ERISA imposes on fiduciaries. Dudenhoeffer requires plaintiffs to...

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