Sonnax sold to Warren Buffett company

by Bruce Edwards Vermont Business MagazineSonnax Industries Inc, a maker of automatic transmission parts in Bellows Falls, was sold in early April to Marmon Holdings, Inc, a subsidiary ofWarren Buffett’s company, Berkshire Hathaway. Sonnax was an employee-owned company, whose ESOP was sued by the US Department of Labor, as first reported by VBM in January 2017.

According to a press release and email, the new company will operate as Sonnax Transmission Company. Terms of the sale were not disclosed. The company will remain in Vermont.

Sonnax has been one of Vermont’s fastest growing manufacturers with three plants in Bellows Falls. Revenues over the last 10 years have nearly doubled.

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.

Steve Boyer, left,with Sonnax Industries CEO Tommy Harmon. Courtesy photo.

As an employee-owned company, the sale was overwhelmingly approved by a vote of Sonnax employees. Steve Boyer was named the new president of Sonnax Transmission. The company said Boyers will work closely with Sonnax Industries CEO Tommy Harmon to ensure a smooth transition into Marmon.

“Joining Marmon affords Sonnax employees the support and stability of a very successful global organization while maintaining its homegrown, entrepreneurial feel,” Harmon said in a statement. “Above all, this expands what we can deliver to our customers, so our future is bright.”

Marmon Holdings is an umbrella company for 175 independent manufacturing and service businesses with facilities in 23 countries and total revenues exceeding $7.7 billion in 2017.

As for the lawsuit, the DOL alleged that the new employee owners were charged too much for the company.

The DOL’s James Lally told VBM in an email that the Sonnax litigation was stayed, pending anticipated settlement, following a mediation held on November 17, 2017. The court granted the stay on November 27 “conditioned upon a contingent event which is highly likely to occur, but which is not certain to occur. This contingent event will occur, if it occurs, within the next 90 to 120 days.”

If the sale of Sonnax was the “contingent event,” it came at the tail-end of the 120-day window described in the court filing. The press release announcing the sale to Marmon was dated April 4, 2018.

Tristram Coffin of Downs Rachlin Martin PLLC of Burlington represented Sonnax, Harmon, Fritz and the Sonnax ESOP.

Coffin told the Brattleboro Reformer that the sale price was “well over $65 million,” with employees getting three times the value of their shares. This would put the sale price in the range of its annual revenues.

ESOP

The US DOL alleged that First Bankers Trust Services, Inc’s 2011 purchase of the company on behalf of the ESOP from its two previous owners caused the plan to suffer sizable financial losses.

Named in the suit (filed with the US District Court District of Vermont December 28, 2016) were Sonnax, a supplier of automotive drivetrain products; Tommy Harmon, its president and chief executive officer; Frederick Fritz, a board member with substantial company control; and First Bankers, headquartered in Quincy, Illinois.

Sonnax, Harmon and Fritz hired First Bankers in 2010 as an independent fiduciary to advise the ESOP on whether, and at what price, to purchase shares of Sonnax from Harmon and Fritz. All defendants are fiduciaries of and parties in interest to the ESOP.

The DOL complaint says, in part, "First Bankers caused the ESOP to overpay for Sonnax stock by millions of dollars." And DOL maintains that Sonnax, Harmon and Fritz knew it was too high, "or should have known."

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On January 3, 2011, the company purchased all of Harmon’s and Fritz’s stock shares for $48.8 million and issued new shares simultaneously which were sold to the ESOP for $10 million. The department’sEmployee Benefits Security Administrationinvestigated and found that First Bankers’ valuation that justified the sale was flawed and its representation of the ESOP during negotiations deficient, resulting in a significant inflation of the purchase price.

According toVermont Business Magazine, Sonnax had revenue of $45.8 million in 2011. Sonnax was named a Best Places to Work in Vermont in 2012 and 2014. The designation relies heavily on anonymous employee surveys.

The sale of a firm for one-time annual revenues is a common benchmark for judging the value of a company, which is about what Sonnax was sold for. Of course, other factors such as debt factor into any valuation.

In its suit, the DOL alleged that the defendants violated ERISA’s prohibited transaction and fiduciary duty provisions.

It further alleges First Bankers:

  • Failed to protect the ESOP in connection with the plan’s purchase of Sonnax stock from Harmon and Fritz.
  • Relied on a flawed valuation of the stock.
  • Did not prudently investigate the transaction’s merits.
  • Purchased highly leveraged Sonnax stock for far more than fair market value, with the aid and knowledge of Sonnax, Harmon and Fritz.

Sonnax, Harmon and Fritz knew that First Bankers’ work was flawed yet failed to ensure that First Bankers fulfilled its fiduciary duties, the DOL complaint states. They also failed to prevent the ESOP’s purchase at what they knew or should have known was an inflated price, and participated knowingly in First Bankers’ fiduciary breaches and otherwise failed to comply with their own fiduciary duties.

First Bankers Trust Services, Inc settled three separate ESOP cases involving the US DOL in November 2017. The Illinois-based financial institution now must undertake enhanced oversight in financing any future ESOPs.

In the Sonnax case, the DOL alleged that First Bankers Trust Services, Inc’s 2011 purchase of the company on behalf of the ESOP from its two previous owners (Harmon and Fritz) caused the plan to suffer sizable financial losses.

In the other cases, the DOL reached agreements to resolve three lawsuits with First Bankers Trust Services, which alleged that FBTS violated the Employee Retirement Income Security Act (ERISA) when it approved stock purchases by three Employee Stock Ownership Plans (ESOPs). As part of the agreements, FBTS will pay $15.75 million to the plans and reform its procedures for handling ESOP transactions.

The Department filed suit against FBTS in 2012 in the U.S. District Courts for the Southern District of New York and the District of New Jersey. The lawsuits followed investigations by the New York office of the Department’s Employee Benefits Security Administration (EBSA) into the FBTS decisions to authorize ESOPs sponsored by Maran Inc., Rembar Co. Inc., and SJP Group, Inc., to purchase stock in their respective companies. FBTS will pay $8 million to the SJP ESOP; $6,642,857 to the Maran ESOP; and $1,107,143 to the Rembar ESOP.

“These settlements provide not only for reimbursement to these ESOPs and their participants, they commit First Bankers Trust Services to clear procedures to enhance and ensure proper compliance in the future,” said the Department’s Regional Solicitor of Labor Jeffrey S. Rogoff, in New York.

“It is imperative that the price a plan pays for the plan sponsor’s stock reflects its true market value and that those retained to advise a plan about the stock purchase fulfill their fiduciary duties,” said EBSA Regional Director Jonathan Kay, in New York.

Timothy McQuiston contributed to this report.