On September 30, 2013, in accordance with a Master Agreement by and among Bradford Hammacher Group, Inc. (“BHG”), the Bradford Hammacher Group, Inc. ESOP (the “BHG ESOP”), the predecessor companies that became wholly-owned subsidiaries of BHG and that “develop, source, and market a wide variety of products[,] including gifts[,] . . . apparel, [and] electronics” (the “Predecessor Companies”), and the shareholders of the Predecessor Companies (the “Former Shareholders”), (i) the BHG ESOP was established; (ii) the BHG ESOP purchased 100% of the outstanding shares of BHG by executing a $100 million promissory note; and (iii) BHG “redeem[ed] or acquire[d] by merger ‘all of its issued and outstanding shares’ of BHG and the Predecessor Companies from the Former Shareholders,” and, in exchange, the Former Shareholders received $82.5 million in cash, $195.9 million in junior subordinated promissory notes (the “Seller Notes”), and 320,000 detachable warrants, which “represented 33.7% of BHG's equity on a fully-diluted basis.”
The DOL filed a complaint on April 22, 2019, alleging that Reliance Trust Company (“Reliance”), the BHG ESOP’s trustee, did not, among other things, (i) meaningfully review Stout Risius Ross, LLC’s (“SRR”) valuation report, which “was rife with red flags,” such as relying on revenue projections prepared by BHG’s management that were “at levels significantly higher than BHG’s historical growth rates”; (ii) “negotiate in good faith over the price terms and issuance of warrants” to the Former Shareholders; or (iii) “meaningfully question SRR’s Solvency Analysis that considered only the period from December 31, 2013 through December 31, 2018, and ignored the September 2019 maturation of $195.9 million” in Seller Notes.1 As a result of these actions, Reliance “caused the overpayment for stock in [BHG] by tens of millions of dollars and losses to the [BHG ESOP].” The case is pending.
Takeaways
- Reliance did not meaningfully review SRR’s valuation report, which included several “red flags,” such as “overly optimistic” revenue projections.
- Reliance did not engage in good-faith negotiations with respect to the price terms or the warrants issued to the Former Shareholders.
- Reliance did not question SRR’s solvency analysis, which did not account for the maturation of $195.9 million in Seller Notes in September 2019.
- Because of its actions, Reliance caused the BHG ESOP to overpay for BHG’s stock by “tens of millions of dollars.”
1 Complaint, Acosta v. Reliance Trust Company, No. 1:19-cv-02725 (N.D. Ill. Apr. 22, 2019), ECF No. 1.
