On October 5, 2011, the Kurt Manufacturing Company ESOP (the “Kurt ESOP”) purchased 457,623 shares of stock of the Kurt Manufacturing Company (“Kurt”), a Minnesota corporation that offers CNC precision machining and other services, for $39 million.
The DOL filed a complaint on October 4, 2017, alleging that, among other things, Reliance Trust Company (“Reliance”), the Kurt ESOP’s trustee, did not meaningfully review Stout Risius Ross LLC’s “flawed” valuation report and ignored previous valuations of Kurt’s per-share value (which were at least $50 lower than the transaction per-share value), thereby causing the Kurt ESOP to pay more than adequate consideration for Kurt’s stock.
The DOL, Reliance, and the “Director Defendants” settled all matters between them on January 5, 2022.1
Pursuant to the Consent Order and Judgment:
- Reliance agreed to pay $8,409,090.91 to the Kurt ESOP.
- The Director Defendants agreed to pay $984,042.44 to the Kurt ESOP.
- The Director Defendants agreed not to participate in Kurt’s Stock Appreciation Rights Plan.
- The Director Defendants agreed not to receive any further contributions from Kurt to the Supplemental Executive Retirement Plan as of July 1, 2021.
- The Director Defendants agreed to rescind their “Employment and Non-Competition Agreements.”
- The Director Defendants agreed to direct GreatBanc Trust Company (“GreatBanc”), the Kurt ESOP’s current trustee, to replace Chartwell Business Valuation with an independent valuation firm.
- The Director Defendants agreed to either (i) increase the number of Kurt’s Board of Directors from six (6) to seven (7) and provide for GreatBanc to select an independent, outside director; or (ii) arrange for Defendant Watson or Defendant Lillyblad to resign and provide for GreatBanc to select the replacement director.
- The Director Defendants agreed not to vote on their own compensation and not to direct GreatBanc on certain matters, including how to vote the Kurt ESOP’s stock.
With respect to ERISA § 502(l) penalties, the DOL assessed (i) a penalty of $840,909.09 against Reliance; and (ii) a penalty of $215,957.56 against the Director Defendants.
Finally, with respect to Reliance’s current and future trustee engagements, Reliance stated that it is not currently serving as an ESOP discretionary trustee, and it agreed that if it serves as an ESOP trustee in the future, it will follow the terms of the “Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions” attached to the Settlement Agreement in Acosta v. Reliance Trust Company, N.D. Ill. Case No. 1:19-cv-02725. (Note that this Process Agreement is not publicly available.)
Takeaways
- Reliance agreed to pay $8,409,090.91 to the Kurt ESOP.
- The Director Defendants agreed to pay $984,042.44 to the Kurt ESOP.
- The DOL assessed (i) an ERISA § 502(l) penalty of $840,909.09 against Reliance; and (ii) an ERISA § 502(l) penalty of $215,957.56 against the Director Defendants.
- The Director Defendants agreed to numerous restrictions on their compensation, and they agreed to add an independent, outside director to the Board.
- Reliance agreed that if it serves as an ESOP trustee in the future, it will follow the terms of the “Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions” attached to the Settlement Agreement in Acosta v. Reliance Trust Company, N.D. Ill. Case No. 1:19-cv-02725, which Process Agreement is not publicly available.
1 Consent Order and Judgment, Walsh v. Reliance Trust Company, No. 0:17-cv-04540-SRN-ECW (D. Minn. Jan. 5, 2022), ECF No. 313.
