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On the eve of Christmas Eve, the parties in a suit involving employer stock struck a deal.
The settlement (Swain v. Wilmington Tr., NA, D. Del., No. 1:17-cv-00071, motion for preliminary settlement approval 12/23/19) involved participants and beneficiaries of the ISCO Industries, Inc. Employee Stock Ownership Plan, and their allegations regarding the plan’s trustee Wilmington Trust, in connection with the purchase of 4 million shares of ISCO Industries, Inc. stock by the Plan on Dec. 20, 2012, for $98 million. The suit claimed that Wilmington Trust violated ERISA § 406, 29 U.S.C. § 1106, because it engaged in a prohibited transaction under ERISA – specifically by first causing the plan to borrow money from ISCO, then causing the Plan to acquire ISCO shares from ISCO, “acting for the benefit of ISCO and the shareholders that sold to or redeemed their shares with ISCO prior to the ESOP Transaction by approving a purchase price for ISCO stock that exceeded its fair market value,” and finally by receiving payment from ISCO for serving as trustee on behalf of the plan.
Specifically, they claimed that this sale allowed the seller to “unload its interests in ISCO at an inflated price” and “saddle ESOP participants with millions of dollars of debt, payable to ISCO, to finance the transaction.” In fact, plaintiffs asserted that, as of Dec. 31, 2012, the ISCO shares purchased by the ESOP were revalued by an independent appraiser at $39 million – a decrease of more than 60%.
For its part in the settlement, Wilmington Trust “denies these allegations; denies any wrongdoing or liability; and has vigorously defended itself in this action,” going on to state that it “does not admit wrongdoing of any kind regarding the ESOP Transaction or this action.”
As a preface to the specific terms (and instructive to those who are mere spectators), the settlement explains that “plaintiffs’ and Wilmington Trust’s counsel received and reviewed over 40,000 documents produced by ISCO, Wilmington Trust, and various non-parties,” that plaintiffs’ counsel “retained and consulted with two experts, who prepared detailed reports and analyses on valuation and due diligence. Wilmington Trust’s counsel likewise retained and consulted with two experts, who prepared reports on similar topics.” The settlement notes that two of the four experts were deposed prior to arriving at the settlement, and that the parties also took a total of 11 fact depositions:
Settlement Scenario
The settlement explains that the parties attempted to mediate this matter with Robert A. Meyer, Esq. of JAMS, drafted and submitted comprehensive mediation statements to Meyer that “focused all sides on the key issues,” and that counsel for the parties attended a one-day mediation in Washington D.C. It was explained that “the attendees vigorously engaged in the mediation process, during which all attendees’ counsel made presentations to Mr. Meyer and all attendees,” but that “despite much deliberation, discussion, and compromise, the Parties were not able to reach a resolution at that time.” That said, those discussions continued in the weeks following the mediation, and the parties were (apparently) ultimately able to reach the proposed settlement on Sept. 25, 2019.
The Settlement itself is relatively straightforward; Wilmington Trust agrees to pay $5 million into a settlement fund, and from that settlement will be paid: (1) taxes (or reserves to pay taxes); (2) settlement administration fees; (3) court-approved attorneys’ fees or expenses; and (4) any Service Awards to the Class Representatives. What’s left after all that will be distributed to the members of the class (the settlement agreement notes that the Plan’s Form 5500 indicates that at year end 2016 the Plan had 389 participants (including one deceased participant whose beneficiaries were entitled to benefits)).
The “service awards” (for named plaintiffs Scott J. Swain and Kenny Fiorito) are not to exceed $15,000 each, and the plaintiffs’ attorney fees are to not exceed “…33% of the Settlement Amount, and for reimbursement of litigation expenses, including the cost and expense of any service company, expert, or consultant retained by Plaintiffs’ Counsel.” Moreover, the agreement stipulates that the “aggregate amount of the attorneys’ fees and litigation expenses shall not exceed 50% of the Settlement Amount.”
What’s interesting here is the explanation offered by the parties as to why the settlement is a good deal; essentially because, they argue, the outcome is uncertain, and likely only determined after extensive litigation. The settlement explains that “Plaintiffs and Wilmington Trust had vastly different views about Wilmington Trust’s actions, its potential liability and the likely outcome of the litigation. Plaintiffs’ core allegations regarding the ISCO stock purchase rested on facts that were strongly contested by Wilmington Trust, including the accuracy of ISCO’s projections, whether the valuation methods employed by Wilmington Trust and its advisors were proper, and whether there were negative facts that were ignored by or not sufficiently investigated by Wilmington Trust during the due diligence and negotiation process.”
On the other hand, “Wilmington Trust vigorously denied all of the allegations, asserted affirmative defenses and otherwise defended its actions with respect to the purchase. Wilmington Trust pointed to evidence of purchase offers by third-parties, in its views, supported the conclusion that it has no liability. Wilmington Trust also retained experts who support such conclusions. Wilmington Trust also opposed class certification and argued that releases signed by the named Plaintiffs would have been an impediment to proceeding as Class representatives.”
Damage ‘Says’
Not only that, the settlement explains that “Plaintiffs and Wilmington Trust also strongly disagree on the proper measure of damages,” specifically that “Wilmington Trust contends that the Plan and its participants were not harmed at all. Plaintiffs, on the other hand, argued that the Plan incurred significant financial damage through its overpayment for ISCO shares.” While those conflicting theories have been shared “extensively in the mediation,” they note that “that core dispute had not been resolved at the time the Parties reached their settlement and the uncertainty put both parties at great risk.” That process, in turn (“fact intensive inquiries”) would, they claim, “have led to a battle of experts and conflicting evidence and testimony, which would have placed the ultimate outcome of the litigation in doubt, because no party could reasonably be certain that its expert or evidence would carry the day.”
There is, of course, the financial end of the argument – essentially that a “bird in the hand is worth two in the bush.” Here the parties note that the settlement – “approximately $12,000 per participant before fees and other costs are applied – is a good result for the Class” (although one should note that the amount after fees and other costs are applied might be half as much).
Now we’ll have to see if the court agrees…
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