Bowers v. Russell is a recent U.S. District Court case where ESOP plan participants sued, alleging the fiduciary breached his duty to plan participants. The company in question was sold to a third party, which prompted the claims. Plaintiffs alleged that plan fiduciaries breached their fiduciary duty by (1) including a minority share discount in shares being redeemed and (2) awarding bonuses to board members and key employees that reduced the value of the redeemed ESOP shares. This article sets forth the facts, issues, and court’s ruling.
Bowers v. Russell is a recent U.S. District Court case where ESOP plan participants sued, alleging the fiduciary breached his duty to plan participants. The company in question was sold to a third party, which prompted the claims. Plaintiffs alleged that plan fiduciaries breached their fiduciary duty by (1) including a minority share discount in shares being redeemed and (2) awarding bonuses to board members and key employees that reduced the value of the redeemed ESOP shares. This article sets forth the facts, issues and court’s ruling.
“Divorce is hard. It doesn’t matter if you’re the one leaving or you’re the one who got left. It makes folks do crazy things.” Ted Lasso: All Apologies (S1E9) (Apple TV released Sep. 25, 2020). In Bowers v. Russell, 2026 U.S. Dist. LEXIS 118935, __ F.Supp.3d __, 2026 WL 1506413 (D. Mass., May 29, 2026), one family came face to face with the consequences of a business owner’s decisions while facing divorce.
Background
Raymond Russell founded and owned an electric equipment manufacturing company, Russelectric. In 2010, facing a divorce from his wife, Raymond[1] caused Russelectric to form an employee stock ownership plan (the “ESOP” or the “Plan”). The Plan borrowed $22 million from Russelectric that it used to purchase Russelectric shares, which, in turn, provided collateral for the loan. The shares were, initially, held in a “suspense” account by the Plan trustee. Over time, Russelectric would make contributions to the Plan. The ESOP used the contributions to repay a portion of the loan. As the loan was paid down, a proportionate number of shares would be released from serving as collateral and those released shares were allocated among the Plan participants’ individual accounts. At any point in time, the shares remaining in the “suspense” account were referred to as unallocated shares and the ones that had been transferred to individual participants’ accounts were referred to as allocated shares.
As a result of the ESOP transaction, the ownership of Russelectric was split between Raymond (35%), his wife (35%) and the Plan (30%). Three of the Russell children (John, Suzanne, and Lisa) sided with their mother and were angered by what they saw as a tactic by their father to limit her property recovery in the divorce proceedings.
Following his father’s death in January 2013, John rose to be the Chairman of the Russelectric Board of Directors that also included two independent directors, Dennis Long and Denise Wyatt. In September 2015 at John’s instigation, the Russelectric board voted to terminate the ESOP among other adjustments to the company’s employee benefits program. After the termination vote, Dennis Long negotiated with the Plan trustee[2] for an orderly buyout of the Plan’s shares. The negotiations led to a deal including a provision that if Russelectric underwent a “change of control transaction” within three years of the Plan termination at a price higher than the termination valuation, plan participants would receive a portion of that premium commensurate with the number of their allocated shares. The “clawback provision” did not entitle participants to any amount based on the value of unallocated shares.
From 2010 through 2016, Russelectric’s fortunes declined. In 2016, John brought in a new Chief Executive Officer, Dorian Alexandrescu, who had substantial experience in the electrical products manufacturing. Mr. Alexandrescu brought in a new management team and significantly changed the organization, including: changing the company’s financial reporting structure, developing new markets and products, and reorganizing the sales force, among other things.
As part of the annual Plan requirements, Russelectric’s valuation firm valued the company stock as of June 30, 2016, at $121 per share. The Plan trustee reviewed and accepted the June 30, 2016, valuation.
To determine the fair market value of Russelectric’s stock as of the termination date, November 30, 2016, the Plan trustee retained the valuation firm to perform another valuation. While no major events had occurred between June 30, 2016, and November 30, 2016, the valuation firm concluded that the value of Russelectric stock was between $120 and $141 per share as of November 30, 2016. The Plan trustee did not share the new valuation report with Russelectric’s officers or directors. The Plan trustee offered to sell the Plan’s shares back to the company at $165 per share.
While not privy to the November 30, 2016, valuation report, Mr. Alexandrescu believed that was too high a price. He, along with his team, conducted their own valuation analysis as of November 30, 2016, reaching a value of $134 per share. Mr. Alexandrescu provided the plan with a counter offer: Russelectric would buy the shares at $134 per share, and if the trustee failed to accept that, the company would trigger the “autoput” option in the Plan documents that would allow it to purchase the shares based on the value at the last annual valuation, or $120 per share. Fearing the autoput and knowing that $134 was higher than the midpoint of the range from the November 30, 2016, valuation report, the trustee accepted the counteroffer. The Plan terminated and its shares were redeemed. In the termination, each Plan participant received a cash payment equal to $134 times the number of allocated shares they held. The unallocated shares were returned to Russelectric and the loan balance was extinguished.
In the months following the Plan termination, Mr. Alexandrescu’s reforms began bearing fruit. The company received several offers from private equity funds, but, at the time, Russelectric was not interested in a sale. However, in late 2017, one of Russelectric’s competitors was acquired by one of Russelectric’s suppliers. The transaction posed an “existential threat” to the company, and the Board authorized Mr. Alexandrescu to pursue a sale of the company before the ramifications of that transaction affected Russelectric’s value.
In February 2018, Siemens, a German corporation, offered to purchase Russelectric for $340 million, a price that far exceeded the price, on a per share basis, that Russelectric had paid for the Plan’s shares just 15 months earlier, triggering the clawback provision of the Plan termination.
On October 1, 2018, the day before executing the agreement of sale with Siemens, Russelectric’s Board of Directors approved payment of $77 million in management bonuses and transaction costs (professional fees and the like) to be paid out of the sales proceeds. Under the bonus plan: John received $14 million, John’s siblings and members of the next generation, collectively, received $11 million, board member Dennis Long received $3 million, the management team, including Alexandrescu and the CFO, received $31 million, and Alexandrescu and the CFO received an additional $7 million for negotiating the transaction.
Since the payments under the clawback provision were based on the “net per share purchase price received by the shareholders,” the board deducted the bonuses and transaction costs from the sale price before calculating the clawback amount.
The plaintiffs, former employees of Russelectric and participants in the Plan, sued the three Russell siblings, the independent members of the Russelectric Board of Directors and the Plan trustee on behalf of a class of former Plan participants and their beneficiaries.[3] The plaintiffs alleged claims arising from:
- The decision to exclude unallocated shares in calculating the proceeds of the clawback provision (the “Clawback Negotiation Claims”);
- The adequacy of the consideration received by the ESOP in the November 2016 redemption transaction (the “Redemption Transaction Claims”);
- The decision to award bonuses in relation to the Siemens transaction, which reduced the clawback payments to plan participants (the “Clawback Administration Claims”); and
- Defendants’ knowing participation in, and benefitting from, the ERISA[4] violations constituting self-dealing and breaches of their fiduciary duties.
Court Findings
Clawback Negotiation Claims
The plaintiffs argued that the Russelectric Board of Directors were fiduciaries to the Plan and that, as the Chairman of the Board, John was required to act solely in the interest of Plan participants in negotiating the clawback provision. By not including the unallocated shares in the clawback formula, John had breached his fiduciary responsibilities.[5]
The court agreed that John was a fiduciary under ERISA but found that he reasonably separated himself from the negotiations over the clawback provisions. Recognizing the conflict of being both a shareholder who would benefit from the termination of the Plan and an officer of the company, John specifically recused himself from all negotiations related to the Plan termination.
In particular, the court noted that including the clawback provision at all provided a benefit to Plan participants as the Plan documents did not include that a change of ownership benefit as part of its terms. Further, the trial testimony showed that nobody had considered including the unallocated shares in the clawback provision. A representative of the Plan trustee testified that it never considered including the unallocated shares in the clawback calculation because, in all the ESOP terminations it had been involved in, that was never part of the deal.
The expert testimony presented at the trial reinforced the fact witness testimony of what the parties had considered during the Plan termination negotiations. Defendant’s expert testified that he had never heard of a clawback agreement including unallocated shares in the calculation. Plaintiff’s expert did not contradict that assessment; he testified that he had never seen a clawback provision expressly include or exclude the unallocated shares in an ESOP.
The court concluded that the plaintiffs had failed to meet their burden of proving that the failure to include the unallocated shares in the clawback provision was a breach of fiduciary duty.
Redemption Transaction Claims
The thrust of the plaintiffs’ Redemption Transaction Claims is that John failed to meet his fiduciary duties in the determination of the redemption price. “[An] employer’s decision whether to terminate an ERISA plan is a settlor function immune from ERISA’s fiduciary obligations,”[6] but the determination of the value of the redeemed shares in the termination does implicate the fiduciary’s obligation to act in the best interests of the plan participants. The key to whether John met his fiduciary duties is whether the Plan participants received “adequate compensation” for their shares.
“A transaction is for adequate consideration if the price paid was ‘the fair market value of the asset as determined in good faith by the trustee or named fiduciary.’”[7] In the instant matter, John, as a member of the Russelectric Board of Directors satisfied his fiduciary responsibility to assure that Plan participants received fair market value for their shares. The board was aware that the Plan trustee, acting for the Plan participants, retained a respected valuation firm to determine the value of Russelectric stock as of the termination date. Russelectric provided the valuation firm with all the information it maintained in the ordinary course of operations and that it had provided to the board. While the board did not review the valuation report itself, that was due to the trustee’s decision that withholding that information during the negotiations was in the best interest of the Plan participants. Further, Plan participants received a share price above the midpoint of the range of reasonable values reflected in the valuation report.
Finally, the redemption price did not include the benefits conferred under the clawback provision.
The plaintiffs argued that Russelectric had received offers from third parties that valued the shares at more than the $134 redemption price. The court noted testimony addressing that issue. The Plan held only 30% of Russelectric’s total outstanding shares, including both allocated and unallocated Plan shares; a minority interest. One third-party valuation was based on an acquisition of the entire company “and therefore included a premium for a controlling interest.”[8] Other third-party inquiries came during the summer of 2017, seven months or longer after the termination of the Plan.
The plaintiffs’ expert challenged the Plan trustee’s valuation firm’s having used a 16% discount rate and a 100% equity capital structure in its analysis. The court noted, however, that (a) Russelectric, in fact, used a 100% capital structure and (b) the plaintiffs’ expert acknowledged that the hypothetical buyer of a 30% interest lacked the ability to alter the capital structure.
The plaintiffs’ expert also criticized the valuation firm’s use of a minority discount as the transaction involved the Plan’s sale of shares back to the company. It therefore involved the majority owner acquiring a greater ownership interest, not a hypothetical third party acquiring a minority interest. The court noted that the use of a minority discount in a transaction involving a sale to a controlling shareholder might be a valid criticism of the valuation. However, errors in the valuation report provided to the trustee did not bear on whether the board, and John in particular, failed to meet their fiduciary duties, as the trustee never shared the valuation report with the board.
The court concluded that the plaintiffs did not meet their burden of showing that John had not complied with his fiduciary duties.
Clawback Administration Claims
The plaintiffs’ Clawback Administration Claims involved Russelectric’s awarding of bonuses to various members of the Russel family, members of the Board of Directors, and members of the management team, and reducing the Siemen’s purchase price by the amount of bonuses paid. Once again, the basis for the plaintiffs’ claims was that John had breached the fiduciary requirements of ERISA.
The plaintiffs’ initial theory was that paying the bonuses out of the proceeds of the Siemens deal was a per se breach as it violated the terms of the clawback agreement. The court disagreed.
The clawback agreement provided that plan participants would receive a cash payment equal to the product of (A) the number of the Company’s common stock allocated to such participant’s account in the ESOP as of the ESOP Termination Date multiplied by (B) the difference between (i) the per share price of the Company’s common stock as of the ESOP Termination Date as determined by a valuation report to be prepared by [the valuation firm]; and (ii) the net per share purchase price received by the shareholders of the Company upon the Consummation of the Change of Control Transaction.[9]
The use of the phrase “net per share price received by the shareholders” indicates an expectation that there would be expenses incurred in a change of ownership transactions and that those expenses would reduce the amount paid to Plan members under the clawback provision. “The board still was bound by corporate and fiduciary duties to deduct only reasonable expenses, but it had no obligation ‘to maximize the award to the [Plan] beneficiar[ies].’”[10] Russelectric’s transaction counsel testified that it is customary to deduct transaction expenses and bonuses before shareholders receive the proceeds of a corporate acquisition, and the court found that testimony persuasive. The question, then, was whether the bonuses actually paid were reasonable and whether John satisfied his fiduciary responsibilities in determining what those bonuses would be.
Plaintiffs have met their burden of demonstrating that John failed to satisfy these duties. John plainly acted to further his and his family’s interests when awarding bonuses in order to “save” money “from the ESOP clawback.” His motives were in fundamental conflict with the interests of plan participants in receiving higher clawback payments. And he failed to act with the diligence of a prudent fiduciary, likely because he did not believe he was a fiduciary at all. Although John hired [an executive compensation consultant] to opine on the reasonableness of the proposed bonus amounts, he did not adequately monitor [the consultant’s] work, which … was deficient in various respects. Indeed, [the consultant] only spent about 10 hours analyzing the proposed bonuses, and he was unaware of the existence of a clawback. [The consultant] had never advised a company with an ESOP and acknowledged at trial that “[y]ou can’t make mistakes on an ERISA plan.” By relying on [the consultant], who essentially rubber-stamped bonus amounts that John and others proposed with little research, John breached the duties of prudence and loyalty.[11]
Having determined that the manner of paying the bonuses constituted a breach of John’s fiduciary duties and that the bonuses reduced the payments that Plan participants would otherwise have received under the clawback, the court addressed the issue of loss causation. John raised this issue as a defense to the claim and needed to show that the bonuses paid were “objectively prudent.” The court determined that bonuses paid to the management team met this standard, but the bonuses paid to the members of the Board of Directors and Russell family members did not.
Regarding the executive team, the court found two factors in their bonus awards particularly compelling. First, all the executive team members had joined the company relatively recently and sacrificed a portion of current compensation in exchange for participation in a long-term incentive plan (LTIP). With the sale to Siemens, not only would their jobs likely disappear, but the deferred benefits of the LTIP would be gone. Second, when Mr. Alexandrescu and his management team joined Russelectric, the company was faltering. It was through their efforts that the company turned around and became an appealing acquisition for Siemens. Finally with regard to additional bonuses paid to Alexandrescu and the chief financial officer, the court noted that their efforts, in addition to their regular job responsibilities, allowed Russelectric to complete this transaction without many of the outside professionals usually employed in merger and acquisition deals, saving the company from substantial fees of outside professionals.
For all the reasons that management team bonuses were reasonable, the bonuses paid to the Russell family members and the two outside directors were not. The court found that while compensation consultant signed off on the bonus structure, his rationale was based largely on a misunderstanding of the company’s operations or a misunderstanding of people’s roles in the business. For example:
- The consultant believed that John, who received a $14 million bonus, was the chief executive officer and actively involved in day-to-day operations. Instead, John was chairman of the Board and served primarily in an advisory capacity to Alexandrescu and the rest of the management team. For that, he received an annual salary of $160,000. Thus, the bonus he received was nearly 88 times his annual compensation.
- The other Russell family members served on an “Advisory Board,” which provided no role in the actual operations of the business. The sole responsibility of the Advisory Board members was to attend meetings of the Board of Directors in preparation for a potentially larger role in the business. Some actually attended board meetings; several did not. None of the Advisory Board members had any actual experience in the industry other than what they knew of Russelectric. Despite having nothing substantive to offer the company, the members of the Advisory Board collectively received $240,000 in annual compensation.[12] The Advisory Board received $11 million in bonuses to divide among them as they saw fit. Thus, the Advisory Board received approximately 46 times its annual compensation from the transaction proceeds which the members had done nothing to advance.
The court concluded that the defendants had failed to carry their burden of reasonable necessity with regard to the non-executive bonuses.
Conclusion
The court found no fault in the defendants’ decision to terminate the Plan or in the negotiations related to that termination, including the terms of the clawback provision. On the other hand, the court found that the defendants, including John and his sisters, played fast and loose with the bonuses that they took from the proceeds of Siemens transaction and, more specifically, that they did this with the deliberate understanding that it would reduce the amount paid to Plan participants under the clawback provision. The court determined that defendants’ failure to fully advise their executive compensation consultant constituted a breach of their fiduciary duties to the Plan participants; hiring a compensation consultant to “tick the box” and rubber-stamp the board’s decisions is not sufficient to satisfy the requirements of ERISA.
[1] Since the dispute involves a family business and numerous Russells, the court designated individuals primarily by first name.
[2] A corporate entity independent of the Russell family.
[3] The independent board members and the Plan trustee agreed to preliminary settlements leaving only the Russell siblings as defendants in the bench trial.
[4] The Employee Retirement Income Security Act (ERISA) of 1974 which, among other things, governs ESOPs.
[5] While the plaintiffs also asserted this claim against the independent directors, those defendants had settled with the plaintiffs, and any claims against them were not an issue before the court in the trial.
[6] 2026 U.S. Dist. LEXIS 118935 at *49, quoting Beck v. PACE Int’l Union, 551 U.S. 96, 101, 127 S. Ct. 2310, 168 L. Ed. 2d 1 (2007).
[7] Ibid. quoting 29 U.S.C. § 1002(18).
[8] Ibid., at *55.
[9] Ibid., at *68, emphasis in opinion, quoting from a trial exhibit.
[10] Ibid., at *69, emphasis added, quoting Cooke v. Lynn Sand & Stone Co., 70 F.3d 201, 205 (1st Cir. 1995).
[11] Ibid., at *69-70, internal citations to the record omitted.
[12] While the court did not specifically mention it, the Advisory Board positions seemed little more than an excuse to pay the shareholder/family members, other than John, a salary for “jobs” that provided little or no value to the business.
Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.
Mr. Molder has served as a valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.
Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.
Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”
Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.
