DOL Commits to Issue Proposed Regulations for Comment Following Hawkins Parnell's Landmark Victory in ESOP Valuation Case
May 11, 2023 (Washington, D.C.) – The U.S. Department of Labor (DOL) committed to moving forward with the process of establishing final regulations for governing the valuation of companies for employee stock ownership plan (ESOP) transactions. These developments are seen, in part, as a direct result of the landmark trial victory against the DOL in the U.S. District Court for the District of Hawai'i in 2021 and the ongoing effort to recover attorneys' fees and costs in the U.S. Court of Appeals for the Ninth Circuit. David Johanson, chair of Hawkins Parnell's Employee Benefits & ERISA litigation group, was the lead trial counsel and argued the appeal before the Ninth Circuit in Hawai'i in February of 2023.
"I cannot praise my clients enough for standing up to the U.S. government and the DOL's long history of overreaching and attempting to legislate ESOPs through litigation while ignoring the ERISA statute and Congressional intent to issue final 'adequate consideration' regulations for ESOP transactions," said David. "They have forced the DOL to finally act on the directive by Congress almost 50 years ago to ultimately create these final regulations as required by ERISA."
Issuing proposed "adequate consideration" regulations for public comment and then finalizing those regulations follows the legislative directive in the SECURE 2.0 Act signed into law on December 29, 2022, that requires the DOL to proceed with such rulemaking. The process aims to clarify the "adequate consideration" exemption under Section 408(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), for ESOP transactions. This commitment from the DOL represents a significant shift in the DOL's approach to ESOPs. The 2022 Congressional directive and the DOL's long overdue commitment is believed to have been influenced by the recent trial victory by David Johanson of Hawkins Parnell and his team. In this case, U.S. Senior Judge Susan Oki Mollway ruled in favor of Hawkins Parnell's client, the engineering firm Bowers + Kubota Consulting Inc., and its selling shareholders, finding them fully compliant with ERISA. This trial court decision was one of the first of its kind in the past 50 years.
David added, "The 'adequate consideration' regulations have been in proposed form since May of 1988. The DOL has used the ambiguity created by a lack of final regulations to its unfair advantage in ESOP fiduciary litigation during the past 50 years."
Hawkins Parnell is seeking to recover attorneys' fees and defense costs on behalf of their clients in the Ninth Circuit. David argued that the government acted in bad faith and without substantial justification in pursuing the litigation that it initiated in April of 2018, which ultimately resulted in a victory for Hawkins Parnell's clients. This effort to recover attorneys' fees and expenses increased pressure on the DOL to clarify ESOP valuations and related transactions for companies and fiduciaries.