Pension & Benefits News Trial court certifies class in ESOP shares buyback dispute
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Wednesday, April 7, 2021

Trial court certifies class in ESOP shares buyback dispute

By Pension and Benefits Editorial Staff

Rejecting concerns over a proposed class’ typicality and adequacy of representation, the federal trial court in Maine certified a class action on behalf of ESOP participants who alleged that company owners bought back the ESOP shares of the members of the class at a below-market rate in a manner that breached their ERISA fiduciary duties.

Establishment of ESOP. In 2004 the family owners of a supplier of welding equipment and industrial and specialty gases established an ESOP. The family members were the sole shareholders in the company. The family (specifically a father and son) retained 51 percent of company stock, while selling 49 percent of stock to the ESOP between 2004 and 2006.

In 2012, two outside individuals purchased the father and son’s 51 percent for $654.62 per share. In 2013, the company and the two new owners terminated the ESOP and reacquired the 49 percent of stock the ESOP had owned. They paid $134.92 per share.

Four former employees and ESOP participants filed suit against the company and the new owners, alleging several ERISA violations, including breach of fiduciary duty under ERISA Secs. 404(a)(1) and 409, violations of the prohibited transaction rules under ERISA Sec. 406, and wrongful denial of benefits under ERISA Sec. 502(a). The participants sought to certify a class defined as all company employees who participated in the ESOP and who sold their shares back to the owners.

Class action requirements. Plaintiffs seeking to establish a class action must first, under Federal Rules of Civil Procedure 23(a), demonstrate compliance with the numerosity, commonality, typicality and adequate representation requirements. A named plaintiff who establishes these prerequisites must then show that the class is maintainable under one of the types of class actions described in Rule 23(b).

Turning first to the prerequisites under Rule 23(a), the court rejected the owners’ contention that the participants failed to establish the typicality and adequacy of representation requirements. (The owners had conceded that the proposed class of over 100 members satisfied the numerosity requirement, while the commonality requirement was met because the allegation that the owners breached their fiduciary duties by paying class members less than fair value for their stock was an issue common to all class members).

Under Rule 23(a)(3), typicality is satisfied when the representative plaintiffs’ “injuries arise from the same events as do the injuries of the class” and when the named plaintiffs’ claims and those of the class are based on the same legal theory. The named plaintiffs met this requirement, the court concluded. They suffered the same injury alleged to have harmed the class: the owners forced them to sell their shares back to the company at a price significantly below market value.

The fact that the complaint contained additional specific allegations of misconduct suffered by the named plaintiffs did not destroy typicality. They were simply additional factual allegations in support of the underlying breach of fiduciary claim. The court also rejected the assertion that typicality failed because two of the four named plaintiffs are subject to unique defenses.

The court also rejected the owners’ arguments regarding the adequacy of the named plaintiffs and proposed class counsel to represent the interests of the members of the class. First, as to the named plaintiffs, who are all former employees, the court determined they can represent the entire class, which includes current employees. The equitable remedies sought by plaintiffs are narrowly tailored to the alleged harms flowing directly from the buyback. These harms would have been suffered by any participants in the ESOP, regardless of current employment status.

Plaintiffs’ counsel are experienced attorneys who can adequately represent the class, even though in their initial filing they sought punitive damages, a remedy not available under ERISA. They successfully amended their complaint to remedy this error.

Class certification. The court certified the class under Rule 23(b)(3), which allows a class action when “questions of law or fact common to class members predominate over any questions affecting only individual members, and…a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”

In this instance, questions regarding the stock buyback, which are common to the class, predominate. The crux of the plaintiff’s claim, the court explained, is that the owners allegedly bought back the ESOP shares of the members of the putative class at the same below-market rate in a manner that breached their fiduciary duties to all of the putative class members.

The court also rejected the owners’ assertion that a Labor Department complaint regarding the same facts filed in September 2020 is a “superior” way to litigate the dispute. The Secretary of Labor lodged no objection to certification of this class and in prior instances has objected to the notion that an ERISA action filed by the agency should usurp a private class action.

Source: Glynn v. Maine Oxy-Acetylene Supply Co (DC ME).

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