ESOP experts anxious about upcoming DOL regs

BVWireIssue #261-3
June 19, 2024

ESOP valuations
ASA, breach of fiduciary duty, overpayment, employee stock ownership plan (ESOP)

A panel at the ASA ESOP Virtual Conference last week was clearly concerned over proposed rules the DOL is expected to issue on how to establish fair market value for shares of a business to be acquired by an ESOP, i.e., “adequate consideration.” This has been an issue of much contention and litigation over the years, so it is hoped that the regs will bring the clarity that valuers sorely need. But don’t expect any “bright-line” rules, the panel noted.

Worst fears: The DOL will not likely get into any specifics and will not issue anything that resembles a treatise or textbook on the matter. In response to a question from the audience as to whether the new regime at the DOL has a more favorable view of ESOPs than the old guard, the answer was “no,” one panel member observed. Also, there has been radio silence from the DOL, even after The ESOP Association sent the agency a detailed framework of what the proposed regs should include. In a worst-case scenario, the DOL could propose rules that are not consistent with accepted valuation theory and practice. However, recourse may be available if that happens, the panel pointed out.

In the meantime, the panel stressed the importance of making comments when the proposed regs are issued. There will be a two-to-three-month public comment period before the regs are finalized during which time stakeholders will have their chance to make their views known.

Other takeaways from the conference:

  • An ESOP feasibility study typically takes about six weeks, and the deal execution takes three to five months;
  • Valuation firms that do the initial ESOP feasibility study cannot also do the annual valuations;
  • The vast majority of ESOPs are now using warrants to help finance the transaction, and trustees are becoming much more sophisticated in these and other financial matters; and
  • Data visualization, i.e., graphs and charts, are much more effective for reports than simple data tables.

More detailed coverage will be in the August issue of Business Valuation Update.

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