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ESOP’s Fable

Posted by David P. Martin | May 06, 2019 | 0 Comments

An ESOP is an Employee's Stock Option Plan, but it can also be fertile ground for a fable. Employers use such plans to lure high-quality people to work for them. Employees' efforts increase the value of the company and thus the value of its stock. Giving employees the option to purchase stock and thus participate in this increased value is a good motivator. But what happens if the Plan pays too much for the stock? Watch the video below to find out more.

That's what happened in the case Brundle v. Wilmington, in which the Plan paid about $29.7 million too much. Paying too much for the stock basically moves money from the plan to the company's coffers. At this level, it can adversely affect the market value of the company and its stock. The employees were adversely affected as they did not get what was promised. A lawsuit was filed. The ESOP contended it paid “adequate consideration” for the stock. The court ruled for the employees, finding that the Plan had overpaid.

The attorneys for the employees sought attorneys' fees. The Plan objected. The attorneys requested a percentage of the common fund which their efforts had created for the employees. The Plan argued that because ERISA has a fee shifting statute there should be no common benefit fee. The court awarded fees based on the common fund.

The 4th Circuit Court of Appeals, agreeing with the 2nd, 8th and 9th Circuits, held that the statutory fee provision did not preclude an award of attorneys' fees based of the common fund. The trial court's opinion was affirmed. The ESOP's contention that it paid an appropriate sum for the stock was clearly a fable. The moral of this story? The employees should have been treated fairly.

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David P. Martin

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