Responding to the appeal in the Lee case, the American Society of Appraisers recently filed an amicus brief supporting the dismissal of the case. The ASA draws attention to the fair market value (FMV) standard that applies in ESOP transactions and discusses the ESOP community’s longtime concern that the Department of Labor and some courts have all but abandoned FMV in scrutinizing ESOP transactions.
The Lee case arose out of the 2016 sale of shares in a construction company to an ESOP. The defendant trustee oversaw the transaction, and an experienced ESOP appraisal firm prepared the valuation underlying the transaction and subsequent annual valuations. The ESOP paid $198 million for an 80% ownership stake in the company. The transaction was financed with a loan from the company and the selling shareholders received warrants that would enable them to acquire additional voting stock. A 2016 year-end annual appraisal, which came 18 days later, valued the shares at $64.8 million.
The plaintiff’s complaint suggested that the two figures showed the trustee caused the ESOP to overpay for company stock. Last fall, a district court dismissed the case, finding the plaintiff had no standing as she failed to show she had suffered an injury. The plaintiff appealed the dismissal with the 4th Circuit Court of Appeals, and the Pension Rights Center (PRC), a nonprofit consumer organization, has filed an amicus brief supporting the appeal. The trustee has defended the dismissal of the case.
Not like a PE buyer: The ASA describes itself as the “largest multi-disciplinary organization devoted to the appraisal and valuation profession” whose members “regularly advise ESOP trustees on the FMV of employer stock for purposes of ESOP transactions, annual ESOP valuations, and other ERISA matters involving FMV appraisals.” Much of the ASA brief counters PRC’s argument that ESOP trustees should, but don’t, act like “real-world” buyers of companies, i.e., private-equity (PE) buyers. Some courts, too, “have been misled into error” on this issue, the ASA says. “Practices of PE buyers are incompatible with ERISA’s requirements and fundamental valuation principles,” the ASA brief contends.
No ERISA provision says a transaction is unlawful unless the ESOP trustee pursues the “lowest price possible for the ESOP” that a real-world (PE) buyer might pay, the ASA brief says. Rather, the valuation standard “specifically” required for ESOP transactions is the FMV. This is also the standard used for annual ESOP valuations, the brief notes. And it is the standard used in the Tax Code and regulations, in the Bankruptcy Code, and by a wide variety of statutes, the brief points out.
FMV is “not the lowest possible price a PE buyer might pay,” the ASA states. Instead, it is an “objective assessment of market forces, and it accounts for competing forces of sellers as well as buyers, both of whom seek to maximize gain.” PE buyers, the brief explains, don’t use the FMV standard for valuations. Rather, they look to “investment value,” a subjective estimate of what a specific buyer or group of investors might pay based on “subjective, personal parameters.” “PE valuations are guided by the rate of return an investor seeks,” the brief explains. In other words, a PE valuation does not consider the pressure “by a seller seeking the highest price.”
The ASA brief claims that, unlike a PE buyer, an “FMV appraiser adheres to valuation principles.” “The ESOP trustee’s statutory obligation to act in good faith does not require it to reject an FMV appraisal performed in accordance with valuation principles,” the brief says.
The ASA challenges a host of other claims about ESOPs that appear in the plaintiff’s and PRC’s briefs and “which are designed to color this Court’s views of ESOPs.” All of the claims are false, the ASA brief says. It notes that, in rejecting the plaintiff’s appeal, the 4th Circuit “has the opportunity to correct misimpressions that have been subjecting ESOPs to unjustified attacks.”
Stay tuned for further updates on this case.
A digest of the district court’s ruling in favor of the defendants in Lee v. Argent Trust Co., 2019 U.S. Dist. LEXIS 132066 (Aug. 7, 2019), and the court’s opinion are available to subscribers of BVLaw. Digests for Brundle v. Wilmington Trust N.A., 241 F. Supp. 3d 610 (E.D. Va. 2017); Brundle v. Wilmington Trust N.A., 258 F. Supp. 3d 647 (E.D. Va. 2017); and Brundle v. Wilmington Trust N.A., 919 F.3d 763 (4th Cir. 2019), and the courts’ opinions also are available at BVLaw.