ROCKINGHAM — After a U.S. Department of Labor Employee Benefits Security Administration investigation, the U.S. District Court for the District of Vermont has entered a consent judgment requiring the fiduciaries of the Sonnax Industries' employee stock ownership plan (ESOP) to pay $2,225,000 to the plan.
The judgment resolves violations of the Employee Retirement Income Security Act stemming from the ESOP's 2011 purchase of Sonnax Industries Inc., a Rockingham-based supplier of automotive drivetrain products. The settlement was announced on May 8.
Principals Tommy Harmon and Frederick Fritz have vigorously denied the DOL claims and any suggestion of wrongdoing.
Under the terms of the settlement, the two company officers and ESOP fiduciaries will pay $2,000,000 to the ESOP to settle claims and an additional $200,000 in civil penalties to the U.S. Department of Labor, while independent fiduciary First Bankers Trust Services Inc. will pay $225,000 to the ESOP and an additional $25,000 in civil penalties.
In October 2017, the Board of Directors received an unsolicited offer to buy Sonnax. The offer - which the Board recognized would greatly benefit the employees - was contingent upon settlement of the lawsuit. Harmon and Fritz shared this information with the DOL in November 2017, and the Labor Department agreed to dismiss the litigation if Sonnax was sold for at least $65 million.
This condition was fulfilled with the March 31 sale of the assets of Sonnax Industries Inc. to Sonnax Transmission Company, a newly-formed subsidiary of Marmon Holdings, Inc.
Overwhelming support
Additional requirements of the settlement stipulate Harmon and Fritz pay $2 million to the ESOP trust, and First Bankers Trust pay $225,000 to the trust as well. These payments are for the benefit of the Sonnax Industries ESOP plan participants, a group that includes both current and former employees.
DOL regulations require a civil penalty in the event of a settlement, so Harmon and Fritz paid $200,000 and First Bankers Trust paid $25,000.
They settled on the terms imposed by the Labor Department solely because it was in the best interest of the employee-owners of Sonnax Industries, they said in a statement.
The employee-owners of Sonnax agreed, they said, voicing overwhelming support for the deal in a proxy vote required as part of the transaction (98 percent voted in favor). Sonnax employees will now share in more than $35 million in proceeds from the sale.
This is a significant financial reward for Sonnax employees and counters the DOL argument, they said, that the ESOP was overcharged and suffered significant financial losses as a result of the 2011 transaction creating the ESOP.
The final settlement was contingent upon Marmon Holdings Inc.'s purchase of Sonnax Industries for an amount exceeding $65 million. That condition was met on March 31, when the purchase occurred.
At that price, the proceeds allocated to the ESOP participants were estimated to be three times the allocated value of their shares as of Sept. 30, 2016. The settlement also excludes Harmon from receiving any settlement monies and prohibits offset of the payments by Harmon, Fritz, First Bankers Trust Services Inc., or any other party.
In a story first reported by Vermont Business Magazine in January 2017, the U.S. Department of Labor sued Sonnax Industries, company officers and ESOP fiduciaries Tommy Harmon and Frederick Fritz, and Illinois-based First Bankers Trust Services Inc in December 2016, following the Employee Benefits Security Administration investigation.
Details of suit
The suit alleged that First Bankers Trust Services Inc. - hired by Harmon and Fritz as an independent fiduciary to advise the ESOP on the purchase - had the plan overpay for Sonnax Industries stock by millions of dollars, which caused the plan to suffer sizable financial losses.
The suit alleged that Harmon and Fritz sold their stock shares to the employees of Sonnax via the ESOP at a price that exceeded the company's value.
Former CEO Harmon said in a statement dated May 8 that: “I am confident we would have prevailed had this case gone to trial. Rick and I took the high road and did what we felt was best for the employee-shareholders of the ESOP. Without the settlement, this opportunity for the employee-shareholders to cash out through the acquisition would have been missed, which would have been wrong.”
His and Sonnax's attorney, Tris Coffin of Downs Rachlin Martin, told VBM that they would have “fought this aggressively” and would have won in court, “but it would have killed the sale” to Marmon.
“What Tommy and Rick really did was the best for the employees,” Coffin said. “In my book, that makes them heroes."
Coffin said Sonnax is a growing manufacturer in Vermont with a strong workforce and, as a Vermonter, he understands the value of both to the state.
Marmon Holdings Inc. is a subsidiary of Warren Buffett's company, Berkshire Hathaway. Marmon is an umbrella company for 175 independent manufacturing and service businesses with facilities in 23 countries and total revenues exceeding $7.7 billion, as of 2017.
Steve Boyer will take over from Tommy Harmon as CEO. Harmon will continue to work with Boyer for the foreseeable future to ensure a smooth transition.
At the end of last year, Sonnax had 246 employees with 200 in Vermont and 46 in New Jersey. In 2017 it reported to VBM that revenues were $67.5 million. A common valuation for a company is one-year's revenue, which in this case is just about what Marmon paid for Sonnax.