Family Feud Savages ESOP Participants’ Retirement Fund

Newark, NJOn May 9, former participants in the Asbury Carbons, Inc. Employee Stock Ownership Plan (ESOP) filed a class action ERISA lawsuit in the District of New Jersey. Lance Miller and Larry Richardson et al. v. Neil Brozen, Asbury Carbons Inc., Patrick Sook and Asbury Carbons Inc. Employee Stock Ownership Plan alleges that ESOP fiduciaries allowed Asbury Carbons, a family-owned company, to be sold to a hedge fund for much less than it was worth. The ESOP owned a significant portion of company stock, and as a result of the sale, ESOP participants lost more than half the value of their retirement savings.

Never get in the middle of a family fight.

Bad blood  

        
Asbury Carbons was founded in 1895 by Harry M. Riddle. The Riddle family owned 80.3 percent of the company’s stock. The ESOP owned the rest. Things seem to have worked well because Asbury Carbons was very profitable with:

• annual sales in the range of $160 to $200 million;
• annual profits in the range of $15 to $20 million;
• significant growth potential; and
• no debt.

The direct descendants of Harry Riddle had always led the company. In 1995, H. Marvin Riddle III handed over the presidency to his son, Stephen Riddle, who also became CEO in 2005. Tellingly, the father also hired an outside professional to coach his son in leadership skills.

Stephen’s leadership of the company prompted disagreements with other Riddle family members. On April 17, 2020, at the insistence of the family, Stephen stepped down from all day-to-day responsibilities, remaining with Asbury Carbons only as a director and significant shareholder. Thereafter, non-family members took over management roles.

The company had already begun to explore “the strategic direction of the company going forward.” In the course of their work, leadership determined that the company was worth between $150 and $180 million.

Then Stephen offered to buy all the shares that he did not already own for $3,000 per share, which totaled approximately $150 million. The company rejected his offer as too low.

Sell ASAP!

          
By the summer of 2021, the Riddle family determined that the only way to avoid a schism in the family was to sell the company. Other than bad blood, though, there was no business reason to sell at that time. Asbury Carbons was thriving; it was the world's largest independent processor of graphite with consistently strong financial results and no debt. Nonetheless, speed appears to have been of the essence for the family

There were two bidders – Unimetal Group, which is a major producer of carbon related products in South America, and Mill Rock Capital. Mill Rock Capital bid more than $105 million. Once it became the exclusive bidder, Mill Rock reduced its bid to $98 million, citing changed business conditions. That was the price at which the company’s stock was sold on March 24. The ESOP fiduciaries could have blocked the sale, but did not.

The ultimate sale price was a long drop from Stephen’s bid of $150 million. The total sale price was approximately $93,212,984, of which the Asbury ESOP only received $18,371,347.01, a collective loss of for the participants of more than $20 million.
The named plaintiffs sued Brozen, the third-party Trustee, who had previously been cited by the Department of Labor (DOL) for ERISA fiduciary duty breaches for his participation in scheme to sell a different company for a grossly inadequate price. Miller and Richardson also sued the company and senior financial officers who had administrative duties with respect to the ESOP.

In their ERISA lawsuit, they allege that:

• Defendants agreed to sell the ESOP holdings of company shares in disregard of independent valuations of those shares and without obtaining an independent opinion that the sale price was fair to ESOP participants;
• They knew the sale was agreed to at an extremely disadvantageous time to sell the company because of an economic downturn in the latter half of 2022; and
• Brozen failed to provide ESOP participants and beneficiaries a vote on the acquisition, as required by the Asbury ESOP.

ERISA to the rescue?

      
According to the DOL:

“The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”

The penalties can be stiff, including personal liability for any losses that participants and beneficiaries suffer because of a breach of these duties. The lawsuit is in its early days yet, but participants in the Asbury ESOP may have reason to be hopeful.