The Courts Address Rights Relating to Employer Stock

In April 2007, both the U.S. District Court for the District of Hawaii and the U.S. District Court for the District of New Jersey addressed issues relating to employer stock held in retirement plans other than employee stock ownership plans (ESOPs). Although neither case addressed ESOP issues specifically, the decisions in both cases affect all plans holding employer stock.

Goodin v. Innovative Technical Solutions, Inc., 2007 U.S. Dist. LEXIS 31320 (D.C. Haw. 2007).

On April 27, 2007, the U.S. District Court for the District of Hawaii, on a motion for summary judgment, ruled that an employer violated the anticutback rules by eliminating 401(k) participants’ rights to receive a put option with respect to in-kind distributions of privately held stock. Innovative Technical Solutions, Inc. (ITS), a privately held company, established a retirement plan in 1998 that contained both a 401(k) component and an ESOP component (the Plan). ITS was primarily capitalized through employee purchases of ITS stock through salary deferrals under the 401(k) component of the Plan. In fact, all of the ITS stock held by the Plan was held in the 401(k) portion of the Plan, and the ESOP portion was never funded. The Plan provided that distributions of ITS stock would be made in either cash or stock. If the distributions were made in stock, the Plan provided a put option with respect to such stock through which the participant could require ITS to repurchase the stock at fair market value. The put option provision was not required by applicable law.

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