On August 26, 2014, the HealthCare Appraisers, Inc. ESOP (the “HAI ESOP”) purchased 80% (i.e., 800,000 shares) of the stock of HealthCare Appraisers, Inc. (HAI), a Florida business appraisal firm that specializes in healthcare firm appraisals, from the Selling Shareholders for $28 million (the “Transaction”); the entire purchase price was financed by a $10 million term note, junior subordinated notes from the Selling Shareholders, and promissory notes to the Selling Shareholders. In addition, HAI issued warrants to the Selling Shareholders in exchange for the remaining 20% of HAI’s stock.
Cindy Alvarez, a former employee of HAI, filed a class-action complaint on August 25, 2020, alleging that, among other things, (i) in approving the Transaction, Wilmington Trust, N.A. (Wilmington Trust), the Trustee of the HAI ESOP, caused the HAI ESOP to pay more than fair market value for HAI’s stock, since the HAI ESOP did not receive a discount for lack of control, and the HAI ESOP paid a control premium, even though the Selling Shareholders retained control of HAI; (ii) Wilmington Trust’s due diligence related to the Transaction was inadequate; and (iii) Wilmington Trust relied upon “unrealistic growth projections, unreliable or out-of-date financials, improper discount rates, inappropriate guideline public companies for comparison, and/or its failure to test assumptions, failure to question or challenge underlying assumptions, and/or other factors that rendered the valuation of HAI stock in the ESOP Transaction faulty.”1
Plaintiff also contended that “Wilmington Trust, CSG [Partners], and [Stout Risius Ross] have done multiple ESOP transactions together, yielding tens of millions of dollars in overpayments to selling shareholders and saddling employees with over-valued stock and excessive debt.”
Finally, Plaintiff contended that Wilmington Trust’s engagement agreement with HAI contained indemnification provisions that are “invalid under ERISA § 410(a) . . . as against public policy because Wilmington Trust violated its ERISA duties to the Plan.”
The complaint represents only Plaintiff’s side of the story, and none of the allegations have been proven as yet. We will update this blog as developments in the case occur.
1 Complaint, Alvarez v. Wilmington Trust, N.A., No. 1:20-cv-01115-CFC (D. Del. Aug. 25, 2020), ECF No. 1.
