The Western District of Arkansas granted summary judgment to all defendants in Shipp v. Central States Manufacturing, Inc., No. 5:23-cv-05215, 2026 WL 868217 (W.D. Ark. Mar. 30, 2026). Shipp is one of many recent lawsuits challenging decisions made by sponsors of mature employee stock ownership plans (“ESOPs”) to manage their repurchase obligation, and the first to criticize releveraging transactions conceptually. This defense-side victory is a significant development for ESOP sponsors who have undertaken or are considering a releveraging transaction—an increasingly popular tool for managing the repurchase obligation. Groom Law Group represented Defendant GreatBanc Trust Company in the lawsuit.
Background
Central States Manufacturing, Inc. (“Central States” or the “Company”) has sponsored an employee stock ownership plan for its employee-owners since 1991 (the “CSMI ESOP”). Historically, the Company managed its repurchase obligation by repurchasing shares from former CSMI ESOP participants and removing those shares from circulation (i.e., “redeeming and retiring”).
By 2019, years of redeeming and retiring stock had reduced the number of outstanding shares, while the Company’s strong financial performance had increased its equity value. The combination of a growing pie with fewer slices caused the stock’s per share growth rate to outpace the growth rate of the Company’s equity value.
This artificial share inflation created a looming problem exacerbated by the large concentration of stock in the accounts of senior employees: the Company’s anticipated repurchase obligation over the next five years increased significantly. Central States projected that, during this period, the repurchase obligation would consume nearly all of its cash flows, which could threaten the Company’s continued viability.
After considering various repurchase obligation strategies, modeling a number of potential scenarios, and retaining consultants to perform repurchase obligation studies, the Company and the CSMI ESOP’s trustee, GreatBanc Trust Company, closed a two-step releveraging transaction in 2020. In step one, the Company redeemed 2.2 million shares from separated participants for $40 million ($18.00 per share). In step two, the CSMI ESOP purchased the shares redeemed in step one from the Company for $40 million ($18.00 per share), which was below their fair market value. The CSMI’s purchase was financed by a $40 million promissory note. As a result of the transaction, separated participants were bought out, and the CSMI ESOP was re-seeded with 2.2 million shares that it would hold in suspense and distribute to current and future participants over the next 40 years.
Plaintiffs’ Allegations & Defendants’ Arguments
In November 2023, three former ESOP participants filed a putative class action lawsuit challenging the 2020 releveraging transaction. Each of the plaintiffs were more senior, highly compensated employees with large ESOP account balances who were near retirement at the time of the 2020 releveraging.
Theplaintiffs alleged that Central States, its board of directors, individual members of the board and/or the Company’s executive management team, and the CSMI ESOP trustee violated ERISA by causing the Company and CSMI ESOP to enter into the releveraging transaction. They claimed that the transaction diluted the value of the ESOP’s shares by $40 million.
Thedefendants argued that the releveraging transaction did not harm the CSMI ESOP. Though it divided the ESOP’s equity value over more shares, releveraging did not lower the value of the Company’s equity value and so did not reduce CSMI ESOP’s overall holdings. Moreover, the defendants argued that the value of the larger stock allocations over time (from the new pool of shares that participants were guaranteed to receive as allocations) would ultimately eclipse any dilutive impact. After this inflection point, active ESOP participants’ total account balances would be higher than they would have been if the releveraging transaction did not occur—a benefit that would only increase with each passing year.
The defendants also argued that the releveraging transaction also benefited Central States and CSMI ESOP participants by:
- Ensuring that the CSMI ESOP’s sponsor would not only continue to exist as a going concern but also have cash to reinvest in its business and grow—benefiting all shareholders;
- Realigning the Company’s per-share value growth rate with its equity value growth rate, which provided a more stable and predictable benefit;
- Creating a pool of shares for allocation to new and future CSMI ESOP participants; and
- Guaranteeing that CSMI ESOP participants would be allocated annual contributions of these shares for the next three decades.
The Western District of Arkansas Rules in Favor of Defendants
After summary judgment briefing, the Western District of Arkansas found in favor of the defendants on all counts.
The court first evaluated whether the Company-side defendants could be liable as ERISA fiduciaries for the 2020 releveraging transaction. The answer was a resounding no. As the court held, “no reasonable jury could find that the two-step releveraging transaction was anything but a corporate decision” outside of ERISA’s scope that was “made with the financial health of the company in mind.” The court explained that “business decisions are not considered plan fiduciary decisions simply because they impact the plan in some respect”—including reductions in share price. Accordingly, the Company-side defendants could only be liable as ERISA fiduciaries to the extent they had a duty to monitor the CSMI ESOP trustee.
The court next held that the CSMI ESOP trustee was an ERISA fiduciary who “was required to maintain duties of loyalty and prudence to the Participants” given the trustee’s responsibility for determining the price at which the CSMI ESOP would sell shares (in step one of the transaction) and purchase shares (in step two of the transaction).
The court held that the trustee satisfied its fiduciary obligations. In particular, the trustee satisfied ERISA’s duty of prudence by, among other things, closely reviewing the Company’s decision-making process, engaging its own independent financial advisor, and negotiating stock prices favorable to the CSMI ESOP.
GreatBanc Trust Company also satisfied ERISA’s duty of loyalty by considering the interests of the CSMI ESOP as a whole and in the long-term. As the court put it, “[t]he Trustee’s duty of loyalty is not to individual Plan Participants but to all Plan Participants or the Plan as a whole.” The plaintiffs, by comparison, were “all terminated or retired employees with large ESOP accounts” who were pursuing a theory that was “less about the Plan than about their individual stock portfolios.”
“Given these facts,” the court viewed the plaintiffs’ allegation that GreatBanc Trust Company “merely rubber stamp[ed] the transaction” as “borderline frivolous,” and granted summary judgment in favor of all the defendants.
Key Takeaways
The court’s ruling is a major win for sponsors of mature ESOPs and the trustees who represent them. Managing an ESOP’s repurchase obligation presents challenges as the plan matures and account values are impacted by many hard-to-predict variables. Sponsors are often required to make difficult tradeoffs in determining which strategies or tools to implement to manage the repurchase obligation in a way that creates a sustainable benefit for participants. Shipp makes clear that such decisions are corporate functions that largely fall outside of ERISA’s purview, and that ESOP trustees can meet their fiduciary obligations with respect to releveraging transactions by monitoring the sponsor’s process, engaging their own financial advisor, and ensuring that stock transactions satisfy ERISA’s adequate consideration exemption.
