Indiana Erector Set Manufacturer’s Former Chairman Sued by ESOP Participants

Former employees of Indiana manufacturer 80/20 Inc. sued the former company chairman on July 14 for multiple breaches of fiduciary duty connected to a leveraged buyout that followed its founder’s 2019 death and ignored his will that stated a preference for the 80/20, Inc. Employee Stock Ownership Plan to buy Wood’s shares.

In the suit, Walther et al. v. Wood et al., plaintiffs Martha Walter, Trent Kumfer and Jayme Lea, on behalf of 80/20’s employees, filed a complaint in U.S. District Court for the Northern District of Indiana against John Wood—former chairman of the company and son of entrepreneur and company founder Don Wood—and Brian Eagle, an attorney and independent trustee of the ESOP. The complaint alleges three counts of fiduciary breach against each individual, while also charging the purchasers, private equity firms MPE Partners II LP and MPE Partners III LP with unlawfully taking advantage of Wood and Eagle’s ERISA violations.

“Defendants John Wood and Brian Eagle violated their ERISA fiduciary duties by failing to exercise or enforce the ESOP’s right to buy 80/20, Inc. shares from the company founder’s estate,” the complaint states. “They further violated ERISA by divesting the ESOP from the company altogether for less than fair value in a deal that benefited company leadership at the expense of the ESOP. Defendants MPE Partners II, L.P. and MPE Partners III, L.P. acquired the company’s equity knowing that their bargain was the result of their co-Defendants’ violations of ERISA.”

The complaint asks the court to hold Wood and Eagle liable to the purported class for damages for lost investment opportunity and for losses on the sale proceeds of ESOP shares diverted to the company leadership and for any ill-gotten gains, as well as an equitable lien or constructive trust on income distributions and capital gains received by or owed to MPE.

None of the defendants responded to a request for comment on the litigation.

80/20’s Origins

Don Wood founded 80/20 Inc. in Fort Wayne, Indiana, in 1986, and his three sons helped him develop the company and are credited as co-founders. The company manufactures patented building components known as The Industrial Erector Set, employing about 400 workers in Columbia City, Indiana.

The ESOP was established January 1, 2016, allowing employees to own company stock and receive retirement benefits based on the company’s value. The plan was administered by 80/20 at the company’s Indiana headquarters.

At the time, Don Wood was the sole voting shareholder and he restated his will in July 2016, adding a new clause related to the disposition of his interest in 80/20 upon his death: “If my estate owns an interest in 80/20, Inc., it is my intent that said interest be sold … in a commercially reasonable manner,” the will reads, according to the complaint. “My preference would be to sell 80/20, Inc. to an employee stock ownership plan for the benefit of the employees of 80/20, Inc., and alternatively to a third-party purchaser.”

Private Equity Enters

According to the complaint, one of Don Wood’s sons, John Wood, returned to the company as chairman of its board in 2019, shortly before his father’s death.

In March 2021, MPE acquired a controlling equity position in t80/20 and retains a controlling equity position, according to the complaint.

The ESOP’s shares of 80/20 were sold to MPE partners in 2021 for $18.2 million, of which plan participants received an estimated $10.1 million—the $8.1 million difference represents the ESOP’s remaining debt to the company after a dividend paydown of $2.17 million—according to the complaint.

Per the terms of the 2021 deal, the ESOP was terminated, and all ESOP shares were redeemed by the company: Account balances were distributed to participants during 2021 and 2022, the complaint shows.

the complaint states. “Discovery will show that MPE granted the bonuses to leadership as consideration for their complicity in steering the acquisition to MPE and away from the ESOP and completing the redemption of the ESOP’s shares. The bonuses represented value of the disposition of the ESOP’s shares that should have been received by the ESOP but was instead diverted to company leadership, ” according to the complaint.

The final step to close the deal with MPE was the conversion of the company to a limited liability company, valuing the new company at an estimated $182 million; however, the plaintiffs alleged that the fair market value was significantly higher.

“Plaintiffs estimate that 80/20 had approximately $105 million in sales in 2020, based on historic revenue and growth rates,” the complaint states. “The average machinery company at the time was worth 3.06 times its sales—supporting a $321 million valuation of 80/20 at the time of the MPE deal.”

The plaintiffs argue that the valuation was confirmed by comparisons with companies in the general industrial machinery and equipment category, showing the median company was worth 3.32 times its sales—supporting a $349 million valuation of 80/20.

“Had the ESOP received fair consideration for its shares in line with the company’s fair market value, ESOP participants would have received around [$]15 million more in distributions upon termination of the ESOP,” according to the complaint.

The ESOP included about 350 participants when it was terminated, according to the complaint. The purported class of plaintiffs are represented by attorneys with the law offices of Engstrom Lee LLC, based in Minneapolis.