Plan Litigation and Latest Trends in Equity Compensation DANIEL JANICH - JANICH LAW GROUP 2008 NCEO/Beyster Institute Employee Ownership Conference Chicago, IL : April 2-4, 2008 : Hyatt McCormick Place Hotel

NCEO/Beyster Institute Employee Ownership Conference Plan Litigation and Latest Trends in Equity Compensation What We Can Learn By Reviewing Recent Cases-- Awareness and Understanding of Hot Button Issues Knowledge of Ways to Minimize Liability Exposure Development of Strategic Plan to Effectively Defend Against Litigation Drafting Tips and Administrative Compliance Recommendations

NCEO/Beyster Institute Employee Ownership Conference Topic of Discussion An Update on Recent ESOP Litigation Daniel N. Janich Janich Law Group 10 South LaSalle Street Suite 3300 Chicago, IL tel: fax:

NCEO/Beyster Institute Employee Ownership Conference ESOP Litigation ESOP Litigation & ERISA Fiduciary Duties Typical Claims Defenses Several Recent ESOP Litigation Cases

NCEO/Beyster Institute Employee Ownership Conference ESOP Litigation & ERISA Employee Stock Ownership Plan (ESOP) - tax qualified retirement plan subject to Employee Retirement Income Security Act (ERISA) ERISA - principal source of law for plan participant and beneficiary rights and remedies-- establishes standards of care for fiduciaries and provides enforcement mechanism for participant and beneficiary redress of grievances

NCEO/Beyster Institute Employee Ownership Conference ESOP Litigation & ERISA ESOP Litigation May Be Brought By Participants As-- Class Action Individual Claims Government Lawsuits Brought by IRS or DOL

NCEO/Beyster Institute Employee Ownership Conference Who Is A “Fiduciary”? A fiduciary -- Exercises discretionary authority or control over plan management; Exercises any authority or control over asset management or disposition; Renders investment advice on plan funds or property in exchange for fee or other compensation Has discretionary authority or responsibility regarding plan administration Fiduciary status -- Determined by function, not title Exposes the individual to personal liability for breach of duty Covers corporate officers who assume fiduciary responsibilities

NCEO/Beyster Institute Employee Ownership Conference Basic Fiduciary Duties under ERISA ERISA identifies basic fiduciary duties: Exclusive Purpose Rule Prudent Person Rule Diversification (ESOPs are exempt to extent they hold “qualifying employer securities”) Follow Plan Documents Prohibited Transactions Exemptions for related-party purchases and sales Exemptions for related-party loans

NCEO/Beyster Institute Employee Ownership Conference Defending Breach of Fiduciary Duty Claims Procedural Defenses Burden of Proof Standard of Review Defense on the Merits

NCEO/Beyster Institute Employee Ownership Conference Defending Claims Relating to Purchases of Employer Stock Prohibited Transactions and the “Adequate Consideration” Standard Independent Assessment of Fair Market Value Prudent Investigation into Employer’s Financial and Legal Affairs; Business Operations

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Implications of LaRue v. DeWolff, Boberg & Associates Section 409(a) - fiduciaries liable for plan losses resulting from breach of duty ERISA Section 502(a)(2) allows monetary damages for breach of fiduciary duty under Section 409(a) Prior to U.S. Supreme Court decision in LaRue, employees could sue only on behalf of plan, not themselves. No monetary damages for individual claims arising from breach of fiduciary duty

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Implications of LaRue v. DeWolff, Boberg & Associates (cont’d) The court decision recognized individuals’ right to sue for monetary damages relating to individual loss pursuant to Section 502(a)(2) Case involved 401(k) plan but decision covers all types of defined contribution plans, including ESOPs Decision may encourage individual suits against ESOPs in certain cases, such as failure to offer a diversification election, decline in stock value before payout Class action suits in ESOP litigation may lessen if court finds participants could have sued as individuals for monetary recovery

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Examples of the types of cases that LaRue may impact in future: Fox v. Herzog Heine Geduld, Inc. (3rd Cir. 2007). ESOP participants claimed monetary loss to their account balance resulting from corporate and ESOP plan merger. District court dismissal upheld on basis that no “plan loss” shown. Kline v. Fidelity Investments Institutional Operations Co.(E.D. Mich. 2008). Former participant claimed monetary loss arising from decreased stock value and in investment income caused by Fidelity’s negligent processing of requested certificate for stock rolled out of ESOP/401(k) plan. Dismissal granted. No “plan loss” involved. Faulkender v. Security Bancshares, Inc. (D. Kan. 2007). Current and former participants alleged fiduciary’s failure to optimize ESOP returns in not buying stock with greater benefits. Claim dismissed.

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Valuation -- Henry v. Champlain Enterprises, Inc. (N.D.N.Y. 2007). Suit by ESOP participants claimed ESOP overpaid for purchase of convertible preferred stock from company owner due to improper valuation. No overpayment shown. Damage award would constitute windfall. Overvaluation;Failure to Divest; Standing -- Harzewski v. Guidant Corp. (7th Cir. 2007). Former employee participants claimed failure to divest company stock during pre-merger period when stock price was allegedly artificially inflated by fraud. Dismissed on procedural grounds; vacated and remanded on basis that former employees were “participants” entitled to seek recovery of amounts that allegedly should have been in their accounts. Overvaluation;Standing -- Hans v. Tharaldson (D. N.D. 2007). Former employee participants claimed fiduciary breach arising from overvaluation of shares resulting in fewer higher priced shares allocated to participant accounts. Cashed out former emloyees did not have standing to assert a claim.

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Overvaluation; ERISA Preemption; Professional Malpractice Claim -- Kloots v. American Express Tax and Business Services, Inc. (6th Cir. 2007). Employer and ESOP trustees alleged accounting firm incorrectly valued stock, in violation of ERISA and state law. ERISA claim dismissed (valuation not fiduciary act). State law professional malpractice claim not preempted. Prudent Man/Investor Standard -- In re Syncor ERISA Litigation (9th Cir. 2008). ESOP participants alleged plan administrator and directors breached fiduciary duties (failure to act with care, skill, prudence and diligence) by knowing of, and/or participating in, international bribery scheme while holding and purchasing artificially inflated stock for ESOP. Scheme uncovered during corporate merger due diligence, resulting in stock value drop. Summary judgment for defendants reversed on appeal. Overvaluation -- United Laboratories, Inc. v. Saviano (N.D. Ill. 2007). Company and ESOP trustee alleged breach of fiduciary duty on basis of overpayment by ESOP for defendants’ shares.

NCEO/Beyster Institute Employee Ownership Conference Recent Federal Cases Valuation; Timing of Payment -- DelRosario and Taylor v. King & Prince Seafood Corp. (S. D. Ga. 2006). Former employees claimed ESOP distribution features and policy that shortened waiting period violated anti- cutback rules of ERISA. Employees would have received substantially more with longer waiting period because the company's stock price rose sharply prior to payout. Held no violation of anti-cutback rules resulting from changed policy rather than plan amendment.

NCEO/Beyster Institute Employee Ownership Conference Contact Information Daniel N. Janich Janich Law Group 10 South LaSalle Street, Suite 3300 Chicago, IL T: (312) F: (312)