The defendant agreed to pay $29,773,250, according to the memorandum filed March 13 in the U.S. District Court for the Eastern District of Virginia.
District Judge Leonie M. Brinkema ruled that the defendant engaged in a prohibited transaction by fialing to ensure that the ESOP paid no more than adequate consideration for the stock in Constellis and, as a result, damaged the ESOP by agreeing to overpay for the stock.
Gregory Porter, of Bailey & Glasser, said the decision lays out important new guidance for ESOP trustees on many valuation issues.
“Two [issues] stand out,” Porter said. “First, the court held that valuation firms and the trustees cannot blindly accept management projections but must scrutinize projections for consistency with past projections and evaluate the self-interest of managers making the projections. Second, the court held that it was improper for the ESOP to pay a control premium when the selling shareholders retained control of the board of directors; instead, the ESOP should have received a discount for lack of control. Both are common problems in ESOP transactions.”
The lawsuit was filed on Nov. 10, 2015, by Andrew Halldorson, on behalf of the Constellis ESOP and on behalf of a class of all other persons similarly situated.
Halldorson claimed ESOP was established by Constellis in 2013 and it is a retirement plan governed by ERISA.
Constellis hired Wilmington to b ea trustee for the ESOP and it was Wilmington’s exclusive duty to ensure that any transactions between the ESOP, Constellis and Constellis shareholders, including loans to the ESOP and acquisitions of Constellis stock by the ESOP, were fair and reasonable and to ensure that the ESOP paid no more than fair market value.
On Dec. 19, 2013, Wilmington caused the ESOP to purchase all the common stock of Constellis from the sellers for $201,529,033 and the ESOP paid $4,235 per share for the stock.
Wilmington caused the ESOP to take a loan for the sellers in the amount of $152,335,331 to complete the purchase of the stock from the sellers.
On July 25, 2014, Constellis was acquired by Constellis Holdings for an enterprise value of $119,685,124, consisting of $20 million in cash, plus the assumption of $99,685.124 in loans to the original sellers.
The sellers had originally received a note for $152,335,331 as part of the consideration for their sale to the ESOP and the note was reduced to $99,685,124. Constellis Holdings paid significantly less for the enterprise than what the ESOP had paid just seven months earlier.
Later that year, Constellis or Constellis Group terminated the ESOP and participants were not allowed to vote on the acquisition of Constellis by Constellis Holdings because Constellis and/or the sellers conferred all the voting rights on Wilmington.
The class claimed that Wilmington caused the ESOP to purchase $200 million-plus of Constellis stock at an inflated price, violating federal pension law and trustee duties.
U.S. District Court for the Eastern District of Virginia case number: 1:15-cv-01494