A Lesson in ESOP Transactions: Do Your Diligence and Don’t Ignore Red Flags

In Pizzella v. Vinoskey, the U.S. District Court for the Western District of Virginia held that an independent fiduciary hired to represent the interests of participants in an employee stock ownership plan (the ESOP) engaged in a prohibited transaction and breached its fiduciary duties of prudence and loyalty in a $21 million transaction involving the ESOP’s purchase of stock from one of the company’s founders. The ESOP was awarded a $6.5 million judgment based on the amount that the Court determined the ESOP had overpaid for the stock. The Court held that the founder and independent fiduciary were jointly and severally liable for this judgment.

The Court focused on two issues:

  • Rushed Diligence: The Court determined that the independent fiduciary rushed through the diligence process, noting that (1) the entire diligence process took just over one month, (2) the fiduciary failed to negotiate the price to be paid for the stock, and (3) the transaction was approved before the final valuation report was delivered.
  • Valuation Report Deficiencies: The Court noted numerous deficiencies in the appraisal that the independent fiduciary failed to question, including:
    • The influence on the appraisal of a $21 million transaction price estimate provided to the appraiser
    • The flawed assumption that the transaction would result in the ESOP having a controlling interest in the company (founder would still control the board of directors and ESOP trustees following the transaction)
    • The lack of financial projections that are part of a widely used valuation methodology
    • Other flawed assumptions including, for example, working capital levels, length of look-back period, and discount rates applied to the valuation methodologies.
  • The Court also noted that even when the independent fiduciary questioned aspects of the appraiser’s methodology (such as the fact that the appraisal was based solely on the capitalization of cash flow methodology without any weight given to the discounted cash flow methodology or other methodologies), these concerns did not result in material changes to the appraisal.


  • DO your diligence. This case illustrates the importance of conducting thorough due diligence. Rushing through the diligence process and cutting corners can prove costly for fiduciaries.
  • DO advocate for the ESOP. Fiduciaries need to act in the sole interest of participants. In this case, the independent fiduciary testified that he wanted a fair price for both the founder and the ESOP. It is not a duty of the independent fiduciary to be fair to the founder (or seller).
  • DO NOT ignore red flags. Fiduciaries need to review the work product of third-party “experts” and ask questions when something does not make sense. It also is important that fiduciaries follow up regarding these concerns and get the experts to address the concerns in their analysis, as appropriate.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About Author: Gregory Ossi

Gregory Ossi resolves labor law issues and ERISA-related litigation matters for clients in the energy production, mining, government contracting, hospitality, manufacturing and construction industries. Greg counsels employers on a broad range of labor and employee benefits matters, such as collective bargaining, mergers and acquisitions, union organizing and retiree health care with an emphasis on multiemployer pension withdrawal liability. He also has extensive experience negotiating retirement and health care plans pursuant to collective bargaining agreements. View all posts by , and

About Author: Erik Vogt

Erik Vogt advises public, private and nonprofit companies in the design and administration of retirement plans, health and welfare plans, and executive compensation arrangements. Erik also counsels clients on mergers and acquisitions and writes frequently on legal developments impacting benefit plans, executive compensation and related matters. View all posts by , and

About Author: Jeremy Pelphrey

Jeremy Pelphrey’s background teaching and lecturing in the areas of tax, statistics and labor management relations reflects the depth of knowledge he applies to counseling businesses, fiduciaries and investment funds on employee stock ownership plans (ESOPs) and other tax-qualified plans, as well as on strategic transactions, ERISA and various fiduciary matters. Jeremy has extensive experience facilitating strategic transactions for corporate clients and advising mature companies on their business succession plans. View all posts by , and

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