ASA, supporting Vinoskey ESOP appeal, aims to correct BV ‘misstatements’

BVWireIssue #217-2
October 14, 2020

ESOP valuations
control premium, discount rate, expert testimony, breach of fiduciary duty, capitalization rate, fair market value (FMV), overpayment, employee stock ownership plan (ESOP), adequate consideration

The ASA recently filed an amicus brief in support of the Vinoskey appeal, in which it claims the district court, in ruling against the ESOP trustee and the owner and selling shareholder, Adam Vinoskey, made numerous valuation-related misstatements that required correction. As the “largest multi-disciplinary organization devoted to the appraisal and valuation profession,” the ASA says it has a significant interest in correcting the court’s misstatements “so they are not repeated in other court cases or otherwise cited as precedent.”

The case focused on a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their successful company to an ESOP that already owned 48% of the company’s stock. An independent ESOP trustee represented the interests of the ESOP, working with an independent valuation advisor to determine the range of fair market value for the company’s stock. The purchase price was $406 per share. A 2009 appraisal valued the stock at $285 per share; earlier appraisals valued the stock at less than that. The Department of Labor alleged the ESOP overpaid for company stock.

As reported earlier, the district court sided with the DOL on liability and, to a large extent, on damages. The court found the trustee caused the ESOP to pay more than fair market value for the company stock. And it said Vinoskey was liable because he knew or should have known the price paid to him exceeded FMV.

CCF vs. DCF: The ASA’s brief finds particularly problematic the district court’s statements related to valuation methodology. For example, the district court, in rejecting the ESOP appraiser’s valuation based on the capitalization of cash flow (CCF) method and accepting the DOL expert’s discounted cash flow (DCF) approach, called the DCF “a more widely-used methodology for evaluating the fair market value of closely-held stock” and said this was the more “commonly used and reliable method.”

These are “wholly inaccurate” conclusions, the ASA brief says. Both methods are the “primary and generally accepted” methods that appraisers use under an income approach. Citing Shannon Pratt and other luminaries of the BV world, the brief explains how the models are similar and how they differ. Which model to use is a judgment call the valuation expert has to make, the brief says. It notes that “an analysis of the historical period as well as the likelihood of changes in any key assumption are the key factors to making the judgment, which is squarely in the purview of the appraiser.”

The brief says that, in assessing whether a fair market value determination is sound, it is critical to look at the assumptions an analyst uses instead of at the model he or she uses. Consistent assumptions result in consistent value results no matter what model the analyst uses. There may be circumstances in which the DCF is more appropriate (companies with more volatile performance in the earlier projected years), the brief acknowledges. However, the district court’s “blanket statement” that the DCF is more reliable is “incorrect.” There also is no empirical data to show the DCF is more widely used than the CCF in valuing closely held companies, the brief notes.

‘Total and unfettered control’: The brief says the district incorrectly stated the DCF “is, by default, calculated on a controlling-interest basis,” necessitating the use of additional discounts to account “for the actual degree of control” the buyer is getting. “Given the frequency in which this method is used to value closely-held business interests, the seriousness of this concern cannot be overstated,” the brief says.

The brief takes issue with the court’s requirement that the ESOP must have “total and unfettered” control of the company to justify an appraisal of a 100% ESOP-owned company on a controlling-interest basis. The court, incorrectly, looked at the issue of control as “black or white—that there is either ‘full and unfettered control,’ or there is none,” the brief says. Here, the ESOP acquired 100% of company stock. Even if the control were not total and unfettered, a BV analyst would want to consider and quantify the elements of control the ESOP gained when valuing the company stock.

The brief says the district court’s treatment of control needs to be corrected to prevent future litigants (or other courts) from asserting that, when a valuation states it was done on a controlling-interest basis, “the appraiser must have assumed the interest being appraised had ‘total and unfettered’ control of the subject company.”

Stay tuned for the government’s response.

Digests of the district court’s 2019 decision in Pizzella v. Vinoskey (earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and Pizzella v. Vinoskey (II), 2020 U.S. Dist. LEXIS 15464; 2020 WL 476669 (Jan. 29, 2020), as well as the court opinions are available to subscribers of BVLaw.

Please let us know if you have any comments about this article or enhancements you would like to see.