Employees of Atlanta, Georgia, U.S.A.-based Inland Seafood have filed a class-action lawsuit alleging its owners engaged in fiduciary mismanagement surrounding their conversion of the company into an employee-owned entity in 2016.
The suit, filed 18 November, 2022, in the U.S. District Court for the Northern District of Georgia, accuses Inland’s executive team of “massively inflating” the value of the company when it created a leveraged employee stock ownership plan in 2016 that is converting Inland into an employee-owned company, in violation of the Employee Retirement Income Security Act.
According to the suit, in November 2016, the plan purchased 100,000 shares of Inland Seafood’s common stock using the proceeds of a USD 92 million (EUR 85 million) loan guaranteed by the company, to be repaid over 30 years via contributions to a trust fund. Each year, a portion of those shares are released from collateral and allocated to the plan’s participants, which as of 2020, included 578 vested employees. Unallocated shares are collateral for the loan.
However, according to the suit, the transaction price “massively exceeded any offer the company had ever received for its acquisition, and substantially outstripped the value the company itself disclosed shortly after the transaction.”
“[It was] a massively inflated number which dwarfed the Company’s true value, based on incomplete and misleading information presented to conflicted valuation advisors without any semblance of an adequate process,” it said. “The company reported, in its Form 5500 submitted to the [U.S.] Department of Labor dated 25 March, 2017, that the fair value of the company was USD 6.449 million [EUR ], or just 7 percent of the purchase price.”
The suit, filed on behalf of five current or former Inland employees, accuses Inland Founder and CEO Joel Knox, Inland COO Bill Demmond, Inland President Chris Rosenberger, Inland Attorney and Register Agent Les Schneider, and Inland Trustee James R. Urbach of failing to adhere to financial laws governing minimum standards for ESOP fiduciaries. At the time of the creation of the plan, Knox owned 80 percent of inland, Demmond owned 10 percent, Rosenberger owned 5 percent, and Schneider owned 5 percent. Each received an amount equivalent to their ownership stakes in the proceeds of the transaction, according to the lawsuit.
“Defendants lacked any sound or reliable process for obtaining an accurate and independent valuation of the company. Instead, defendants obtained inaccurate business valuations based on flawed and incorrect information provided by defendants to several different valuation advisors,” the suit said. “Defendants then selected the largest and most inaccurate valuation from those valuations that they received, seeking to increase the transaction purchase price to the maximum possible amount, without regard to the interests of plan participants or the true value of the company.”
The Inland owners “actively campaigned for larger valuations from competing valuation advisors, employing company sales representatives to try to convince the valuation advisors to increase their business valuations based on inaccurate information,” the suit alleges.
Inland’s owners “knowingly provided false information in support of the company’s valuation to valuation advisors to inflate the value of the company in connection with the transaction,” according to the suit.
“Instead of obtaining an independent evaluation from a valuation advisor, defendants solicited multiple competing valuations from various valuation advisors, essentially conducting a reverse auction to select the highest valuation. Defendants obtained the USD 92 million transaction price by intentionally and actively deceiving multiple valuation advisors regarding the company’s assets and future business prospects, benefiting themselves at the expense of the plan and its participants.”
A stockpile of “old frozen salmon fillets that were essentially worthless” was passed off as premium fresh salmon fillets, the lawsuit alleges. And valuation advisors were given false information regarding the company’s future sales prospects “when in reality there was no realistic prospect of obtaining this business.”
“For example, defendants falsely represented that they had a realistic expectation that the retail and value-add business segments of Inland Fresh and its subsidiaries would experience increases in sales revenues of over USD 30 million during the approximately three-to-five-year period following the transaction. Defendants further represented that the company’s value-add business would double in value in the three to five years following the transaction. These representations had no basis, and were false.” the suit alleges. “As part of defendants’ efforts to obtain an inflated transaction price, defendants additionally represented they expected Inland Fresh to obtain millions of dollars in business from Sam’s Club over the approximately three-to-five-year period following the transaction.”
Valuators were led to believe the company had millions of dollars in its sales pipeline to Sam’s Club, Sprouts, and Compass – U.S. grocery chains – as well as significant sales prospects in Canada and the U.K, but these expectations were not realistic, the suit alleges.
After receiving additional information from the company – which the suit alleges was false or misleading – valuations of Inland rose from USD 50 million (EUR ) or less to around the final transaction price, the suit said. At the same time, competitive offers from other companies to buy Inland in the years before 2016 were all “far smaller” than USD 92 million, the suit said.
“Defendant never seriously solicited any bids from outside entities as an alternative to proceeding with the transaction. Defendant had no process whatsoever for soliciting outside bids from potential buyers of the company,” it said. “Had defendants not wrongfully caused the transaction to take place at a grossly inflated valuation, plan participants would not have lost tens of millions of dollars of their retirement savings.
Schlichter Bogard & Denton LLP Attorney Andrew Schlichter, who is leading the case, told SeafoodSource he is confident in the strength of the case.
“Defendants’ alleged fiduciary breaches are serious and significant,” Schlichter said. “We look forward to a trial.”
Knox, also speaking to SeafoodSource, declined to get into the specifics of the case.
“In most cases we are glad to speak to members of the 5th estate about most anything. But not in this legal case,” Knox said. “We are very busy working hard and building a better Inland for the future of all our shareholder-employees.”
The ESOP is was worth USD 11,591,000 (EUR 10,731,411) at the end of the 2021 financial year, according to financial documents filed in the case. According to the Plan’s Form 5500 filed in March 2020 with the U.S. Department of Labor, its assets were at a net deficit, including both allocated and unallocated shares, of USD 49,580,581 (EUR 48,015,90) ...
Photos courtesy of Inland Seafood