Russelectric ESOP Shares Sold at Less Than Fair Market Value ERISA Class Action

Towards the end of his life, the founder of Russelectric, Inc., Raymond Russell, gave 30% of his company stock to its employees as a retirement benefit, through the Russelectric Inc. Employee Stock Ownership Plan (ESOP). However, the complaint alleges, after Russell died, “the company, at the direction and for the benefit of the founder’s heirs, reclaimed the ESOP’s shares and terminated the Plan.” This class action brings suit under the Employee Retirement Income Security Act (ERISA) against three of the Russell heirs and others, claiming that they underpaid for the stock.

The class for this action is all participants and beneficiaries of the Russelectric Inc. ESOP who would have been entitled to additional allocations under the terms of the ESOP had the unallocated shares been redeemed for adequate consideration.

The shares in the ESOP were divided into two lots: some had been allocated to participant accounts, but about two-thirds of them were still unallocated. The ESOP had bought the shares through a twenty-year note, with shares being allocated each year in proportion to the part of the note paid off.

The complaint alleges that the terms of the ESOP said that participants could obtain a higher, resale price for their shares, but that this applied only to the shares that had been allocated.

The complaint alleges, “The Russell heirs resented the ESOP and the below-market price their father obtained for the stock that he transferred to Russelectric workers for their retirements.”
The complaint claims that, while they accepted paying fair market value for the allocated shares, they “cynically and erroneously believed that the unallocated shares could be redeemed at the same discounted price at which their father transferred the shares to the ESOP.”

The heirs, with the acceptance of the other defendants in this case, the complaint alleges, bought the unallocated shares at a lower price.

The complaint alleges that this was a violation of ERISA, because it constitutes the sale by a plan of employer securities to the employer or another party-in-interest without “adequate consideration.”

It quotes an earlier court case as saying, “[A] fiduciary who engages in a self-dealing transaction [to purchase company stock from an ESOP] had the burden of proving that he fulfilled his duties of care and loyalty and that the ESOP received adequate consideration” and another as saying, “[S]tock held in an unallocated … account … is an asset of the ESOP…”

Therefore, the complaint alleges, the Russell heirs had no right to take back the employees’ retirement benefit shares at less than their fair market value.

The complaint traces the history of the dispute about the ESOP between Russell, his wife, and his children. It claims, “In 2019, the four Russell heirs sold their Russelectric stock, through the Russelectric Stockholder Trusts, to a multinational manufacturing and energy conglomerate, Siemens, and directed proceeds of the sale into certain trusts (collectively the ‘Russelectric Stock Proceeds Trusts’). On January 1, 2020, Russelectric was merged into Siemens…”

Article Type: Lawsuit
Topic: Employment
Tags: ERISA Violations, Retirement Plans, Self-Dealing