Expert comments on Vinoskey ESOP ruling

BVWireIssue #203-2
August 14, 2019

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

ESOP appraisers are questioning the technical aspects of the Vinoskey and Brundle rulings and asking what the recent rulings may mean for the future of employee ownership plans. Jim Joyner (Integra Valuation Consulting LLC), a certified business appraiser who has served as ESOP trustee for almost 100 ESOPs, offers his takeaways.

Joyner says the recent rulings are an “ominous sign for every ESOP formed within the past six years.” As he sees it, “no ESOP is safe from the DOL’s aggressive oversight and litigation-driven enforcement approach.” He notes that the Vinoskey decision “advances the DOL’s position that, if the ESOP does not gain ‘unfettered control’ over the company immediately after the acquisition of all company stock, appraisers must apply a discount for lack of control (5% in this case) against the indicated equity value.”

He also points out that the court’s many direct and indirect criticisms of the use of the capitalization of earnings/cash flow method for the ESOP appraisal make it clear that this method “is practically anathema for any ESOP valuation.” Any appraiser brave enough to use it needs to use a “look-back” period of six years or more, Joyner cautions.

Joyner finds it particularly troubling that this 100-page opinion contains no meaningful discussion of the standard of fair market value. He notes that the court seemed concerned exclusively with what a hypothetical buyer (the ESOP) would agree to pay when the FMV standard also requires consideration of what a willing seller would accept to close the deal. As FMV is traditionally understood, both sides must be considered, Joyner says. He contrasts this decision with certain U.S. Tax Court decisions in which Tax Court judges rigorously framed their discussion of FMV in terms of a hypothetical willing buyer and a hypothetical willing seller, both parties seeking to achieve an economically advantageous outcome.

What is missing in this long court opinion, Joyner notes, is any consideration of Vinoskey’s decision to make the successful company he created into an employee-owned company. Joyner continues: “I have never met Mr. Vinoskey, but I imagine he is filled with bitter regret. Overall, this ruling may have a chilling effect on other entrepreneurs considering an ESOP. The decision was not in the best interest of employees who would like to benefit from the most successful form of employee ownership: an ESOP.”

Joyner concludes: “To me, this case shows why federal district court judges should no longer adjudicate ESOP lawsuits. The complexity of ESOP litigation demands a special master who has the financial skills that are found among Tax Court judges, patent law judges, or the Delaware court judges. The outcome of ESOP cases can contribute to the demise of this form of employee ownership or help with its expansion. It’s therefore important that these complex cases are tried by a specialized court.”

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