Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company. The case involved an ESOP set up in 2004 by TPP, an architectural firm in Atlanta. The DOL had a long winning streak in these cases, but that ended last year with the Bowers case, which was a major win for the ESOP community. With this new case, the tide continues to turn against the DOL. 

Issue of control: The initial draft valuation done for the trustee included a 23% minority discount, but that was eliminated in the final valuation report when it was agreed that a number of “control mechanisms” were to be put in place. The DOL’s position has been that a minority discount must be applied unless the ESOP has “total and unfettered” control of the sponsoring company. In this case, the ESOP owned 51% of the sponsoring company’s stock, but a number of the other control mechanisms were never put in place. Therefore, the DOL expert’s valuation was prepared on an “as is” basis (so a minority discount was baked into the valuation)—plus he deducted an extra 10% for certain factors. But the court rejected the DOL’s valuation in favor of valuations done by an expert from Stout, who testified on behalf of the defendants. 

The case is Walsh v. Robert N. Preston, et al., Case 1:14-CV-04122-ELR, U.S. Dist. Court, Northern District of Georgia, Atlanta Division, Filed 09/20/2022.

Stay tuned: This is a long case with other valuation issues (including the use of forecasts and company-specific risk), so watch for further commentary. Also, a full case digest and analysis as well as the court opinion will be available soon on the BVLaw platform.  

Extra: In separate news, the ESOP Association has petitioned the DOL to (finally) “provide clear regulation and guidance as Congress directed.” The valuation community has been waiting (four decades) for the DOL to finalize regulations that were proposed way back in 1988.