A Minnesota judge recently approved an $84 million settlement, including attorney’s fees and expenses, between three former employee participants in Wells Fargo’s 401(k)/Employee Stock Ownership Plan (the “KSOP”), representing the class of similarly situated participants (the “Plaintiffs”) and GreatBanc Trust Company, Wells Fargo & Co., and Wells Fargo’s former CEO Timothy J. Sloan (the “Defendants”). Plaintiffs alleged that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by violating ERISA’s anti-inurement provision and engaging in prohibited transactions. A KSOP is a hybrid retirement plan that combines an Employee Stock Ownership Plan (an “ESOP”) with a 401(k) plan. Whereas ESOPs are funded entirely by an employer, KSOPs permit employees to make their own contributions.
In the instant matter, the KSOP was formed in a levered transaction in which Wells Fargo provided a loan to the KSOP and the KSOP used the loan proceeds to purchase Wells Fargo convertible preferred stock. Order Granting Final Approval of Class Action Settlement and Awarding Attorneys’ Fees, Costs, and Service Awards (the “Order”), p. 3. The convertible preferred stock was held in a suspense account, acting as collateral for the loan, with the proceeds from the dividends paid to the convertible preferred stock used to pay down the loan. Order, p. 3. As the loan was paid down, convertible stock was released from the suspense account and allocated to the employee participants in the KSOP. Each allocated share of convertible preferred stock was then converted into $1,000 worth of common stock. Order, p. 3.
ERISA’s anti-inurement provision dictates that the assets of an employee benefit plan must never inure to the benefit of the employer. They are to be held for the benefit of the plan participants. Plaintiffs alleged that Defendants violated this provision by treating the released common stock as if it satisfied Wells Fargo’s required matching contributions and discretionary profit-sharing contributions. Order, pp. 3-4. Plaintiffs have also alleged that Defendants caused the KSOP to overpay for the convertible preferred stock in the levered KSOP transaction. Order, p. 4.
In its analysis of settlement and consideration of Plaintiffs’ likelihood of success, the Court discussed Plaintiffs’ “novel” theory of liability, pointing to similarities between this case and recent case law involving plan forfeitures, which have tended to favor employer defendants. Order, p.8.
As to its analysis of the potential range of successful outcomes for Plaintiffs. The Court pointed to the analysis proffered by Plaintiffs’ expert, who quantified a range of damages from a low of $11 million to a high of $480 million, but the Order notes that Defendants would have likely sought an offset from their $132 million settlement with the U.S. Department of Labor in 2022. Order, p. 9.
Given this analysis, the Court found that the $84 million settlement was within the bounds of successful outcomes and found it reasonable based on the risks of pursuing the litigation, among other considerations. Order, p. 9. The Court noted Plaintiffs’ counsel’s representation that the $84 million settlement represented “the largest-ever class action settlement of ERISA claims arising from an employee stock ownership plan.” Order, pp. 13-14.
The Court also approved Plaintiffs’ counsel’s request for fees of 24% of the settlement plus expenses, noting that none of the 425,851 class members notified of the settlement had objected to either the settlement or the fees. Order, p. 11.
Although the settlement may be best for the parties involved, it unfortunately removes any insights a court ruling may have provided as to the distinguishing factors in this matter from the recent case law on plan forfeitures, leaving similarly structured KSOPs to potentially grapple with future ERISA-litigation uncertainties.
Author Background: David J. Neuzil, CFA, ASA, is a Director with Coherent Economics, LLC. For more than ten years, Dave has been helping business owners, attorneys, and courts understand complex issues involving valuation and damages. His expertise includes the analysis of sophisticated capital structures, ESOP transactions and valuations, derivative securities, and securities with embedded options. Dave’s litigation support has spanned numerous high-profile matters in the Delaware Court of Chancery and U.S. District Courts.
The views and opinions expressed in this content are solely those of the author, do not necessarily reflect the views of the firm, and should not be construed as professional advice.