Compliance August 15, 2017

Court Sides With Wilmington Trust on ESOP Challenge

A judge said the plaintiffs did not allege an injury because, although the purchase price of the stock was allegedly inflated, the stock has not been sold at a loss.

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A federal court judge has agreed with Wilmington Trust that participants in an Employee Stock Ownership Plan (ESOP) that purchased shares at an allegedly inflated price lack standing to sue.

ISCO Industries sponsors the ESOP and Wilmington Trust is its trustee. On December 20, 2012, ISCO and/or its prior owner(s) sold four million shares of common stock in the company to the ESOP in exchange for a 25-year note of $98 million, accruing 2.4% annual interest. As of December 31, 2012, the ISCO shares purchased by the ESOP were revalued by an independent appraiser at $39 million—a decrease of more than 60%. The plaintiffs in the case sued Wilmington Trust for causing and engaging in prohibited transactions forbidden under the Employee Retirement Income Security Act (ERISA).

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Chief U.S. Magistrate Judge Mary Pat Thynge of the U.S. District Court for the District of Delaware found that the plaintiffs lack standing for subject matter jurisdiction because they did not allege an economic injury. “As our sister circuits have noted, Supreme Court precedent guides: ‘an inflated purchase price will not itself constitute. . . economic loss. . . . Rather, stock must be purchased at an inflated price and sold at a loss for an economic injury to occur.’ Here, stock was purchased at an allegedly inflated price and no sale occurred thereafter. Therefore, no injury-in-fact can be identified,” Thynge wrote in her recommendation.

She also noted that to obtain injunctive or declaratory relief, plaintiffs must show “real or irreparable injury, a requirement that cannot be met where there is no showing of any real or immediate threat that the plaintiffs will be wronged again.” Thynge found the plaintiffs allege injuries incurred in the past and provide only a conclusory statement that “they continue to suffer such losses in the present.” In addition, she said, the plaintiffs “weakly counter that Wilmington Trust is the trustee and, as a result, the alleged harm could happen again.” She ruled that this does not prove an actual present harm, nor a “significant possibility of future harm,” so the plaintiffs lack standing required for injunctive or declaratory relief.

Thynge recommended that Wilmington Trust’s motions to dismiss for lack of standing be granted.

She did, however, agree with the plaintiffs on one point—they sufficiently plead enough facts to state a claim that ISCO can be identified as a party-in-interest to the prohibited transaction. She recommended Wilmington Trust’s motion to dismiss this claim be denied.

Thynge’s recommendation allowed for the parties to serve and file specific written objections within 14 days after being given a copy of her report.

Data and Research August 15, 2017

Offering Benefits a Matter of Economics for Small Businesses

Paychex found the more revenues a business earned, the more likely it was to offer retirement and health benefits to employees.
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The majority of small- to mid-sized businesses (SMBs) do not offer health, retirement or other ancillary benefits, Paychex found in a survey of 318 such companies. Only 38% offer such benefits.

“While this contrasts national levels, it does reflect in part the absence of legal requirement for businesses with less than 50 employees to offer benefits—most notably, health insurance,” Paychex says. “Providing benefits is also a matter of economics for many SMBs. Of businesses earning less than $500,000 in revenues, 78% reported that they do not offer benefits. This is in contrast to responses from businesses with revenues of more than $1 million, where 74% confirmed that they do offer benefits to their employees.”

Similarly, 66% of businesses that have been in operation for 10 years or more offer such benefits. However, this drops to 42% for businesses between six and up to 10 years in existence. Likewise, 77% of companies that say they are experiencing stagnant growth do not offer benefits, but 51% of companies that are experiencing fast growth do offer them.

Among the companies offering benefits, the top values they cited from offering these benefits were improved employee morale and ability to attract and retain talent.

For health insurance benefits, the top reason for offering was split between attracting talent (23%) and supporting healthier employees (22%). Only 2% of respondents who offered health benefits reported that they didn’t see a need to offer these benefits.

When considering retirement benefits, minimizing turnover was reported as the most important reason (23%) for offering this benefit, followed closely by the individual need for the benefit (20%). Attracting talent remained important (18%), but 17% of respondents said they did not see the need to offer retirement benefits to their employees.

Among the companies offering health and retirement benefits, they said they found them to be a positive addition to their businesses, with 89% saying a health insurance plan was beneficial and 72% saying a retirement plan was beneficial.

As Paychex concludes, “For businesses, offering benefits to employees can be a challenge. This is especially true the smaller the business is and the business’s economic environment. However, the value of offering benefits to employees, especially health insurance, is unanimously understood and appreciated. This survey showed that the majority of businesses that do offer benefits find them beneficial to their businesses and they see value in the benefits they offer. As largely perceived, if a business doesn’t offer benefits to its employees, a competitor will. As the size of a business grows and revenues increase, the value of benefits becomes clearer, as well as more achievable.”

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The full findings of Paychex’s survey can be downloaded here.

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