Compliance

ESOP Did Not Meet Burden of Proof in Case Regarding Failed Transaction

An appellate court first discussed where the burden of proof lies in ERISA cases.

By Rebecca Moore editors@plansponsor.com | June 29, 2017
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The 10th U.S. Circuit Court of Appeals has found that an employee stock ownership plan (ESOP) sponsor was required to prove a transitional trustee was at fault for a failed transaction and failed to do so.

The Case 

Pioneer Centres Holding Company owned and operated (through its subsidiaries) several automobile dealerships in Colorado and California, including Land Rover, Audi, and Porsche. In 2001, Pioneer sponsored an ESOP under the Employee Retirement Income Security Act (ERISA). Matthew “Jack” Brewer, Pioneer’s founder, initially owned 100% of Pioneer’s stock. Over the course of several years, Brewer sold 37.5% of his Pioneer stock to the plan and retained 62.5% ownership. 

In 2009, the Plan’s trustees proposed a stock transaction whereby the ESOP would become the 100% owner of Pioneer. To avoid any conflict of interest issues, the plan hired Alerus as an independent “transactional trustee.” Alerus’ job was to determine whether, and on what terms, the plan should purchase Brewer’s shares. 

According to the court’s opinion, Pioneer’s dealership agreement with Land Rover required approval before any changes in ownership or management occurred, stating: “[T]here will be no change in the foregoing [dealership ownership and management] in any respect without [Land Rover’s] prior written approval.” The agreement also granted Land Rover a right of first refusal to purchase any of Pioneer’s stock offered for sale. 

Pioneer sent a letter to Land Rover in which it asked Land Rover to consent to Brewer’s transfer of his remaining Pioneer stock to the plan to make the plan the 100% owner of Pioneer. The letter included the proposed terms of the transaction and informed Land Rover that Pioneer’s management would not change. 

Land Rover responded with a letter stating terms of its dealership agreement with Pioneer and other objections to the purchase. Pioneer (assisted by Alerus) responded, interpreting Land Rover’s letter as announcing a prohibition against ESOP-owned dealerships, and asserting that this position violated California and Colorado law, as well as federal public policy favoring ESOP ownership.

Land Rover responded by indicating it had not yet received a formal ownership transfer proposal from Pioneer, but that Pioneer was free to submit any ownership transfer proposal and Land Rover would consider it in good faith and on the merits. Pioneer never responded to this.

NEXT: Transaction abandoned and Alerus gets sued

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