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Purchasing a Participant's ESOP Stock With a Promissory Note: Is Your 'Adequate Security' Really Adequate?
Warner Norcross & Judd LLP [Guidance Overview] Oct. 28, 2009 Excerpt: There is very little case law regarding 'adequate security' when a promissory note is used to purchase the stock distributed to a participant from an ESOP. In a 1995 case3, former ESOP participants claimed ESOP Trustees had breached their fiduciary duty by purchasing stock from participants with a promissory note secured by a pledge of the stock. The lower court easily found this was not a breach of fiduciary duty, and ruled in favor of the Trustees. On appeal, the Appeals Court sent the case back to the lower court for further proceedings, finding that the facts might have given rise to a breach of fiduciary duty. There are no further reported proceedings for the case. |
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