Starkly different valuation narratives in Vinoskey ESOP trial

BVWireIssue #197-1
February 6, 2019

ESOP valuations
expert testimony, breach of fiduciary duty, capitalization of earnings, discounted cash flow (DCF), fair market value (FMV), overpayment, employee stock ownership plan (ESOP)

Post-trial briefs in last year’s Acosta v. Vinoskey ESOP case reveal insights into how each side shaped the valuation narrative. The trustee had launched a partly successful Daubert attack on the Department of Labor’s damages expert testimony, but the DOL’s overpayment claim survived and went to trial.

In late 2010, the owners of a Virginia company sold the remaining 52% of their company stock to an ESOP for $406 per share. In 2009, the stock was valued at $285 per share. The DOL argues the $406-per-share price exceeded fair market value. In agreeing to the transaction, the independent trustee, tasked with representing the interests of the ESOP, caused the plan to overpay. Accordingly, it breached its fiduciary duties. The DOL claims the sales price was “predetermined.” The trustee offered it before the ESOP appraiser even finished his valuation; it made no effort to negotiate a lower price. The DOL calls the trustee’s due diligence “rushed and cursory” and says the defendants engaged in “machinations” to “give a false impression of a diligent process.”

Inflating value of stock: According to the DOL’s trial damages expert, the ESOP appraiser “artificially inflate[d] the stock price.” The appraiser did this by manipulating the capitalization of earnings method—using earnings periods to measure the historical cash flows that were too short, adding back half of the company’s healthcare costs into the calculated cash flows even though this was not done in prior appraisals, using an unreasonably low discount rate as well as an unreasonable high long-term growth rate, and including excess cash and the value of land assets when they had been excluded in earlier appraisals. The ESOP paid a control premium but did not in fact obtain control in the acquisition; the appraiser should have applied a lack of control discount, the DOL claims. In sum, the ESOP paid $20.7 million for stock that was worth about $9.2 million. The DOL asks the court to restore to the ESOP over $11.5 million in losses and prohibit the defendants from serving as ERISA trustees in the future.

DOL expert’s ‘patently unreasonable’ valuation: In countering the DOL’s valuation arguments, the defense notes the company owned land and property worth about $8.8 million. The company averaged more than $4 million in annual profits in each of the previous five years. By November 2010, when the transaction was in process, the company had generated $4.8 million in profit. According to the defense, the trustee’s due diligence was a “thorough, documented process.” Further, the trustee used “an extremely respected independent valuation firm.” In contrast, the DOL’s damages expert presented a “patently unreasonable” valuation that “contains mathematic and factual errors.” The DOL expert offered a view of control “that is contrary to law and the Department of Labor’s own guidance, is undermined by his own opinions in other ESOP cases and does not adhere to any valuation standards.” The defense maintains the court cannot rely on this expert opinion “riddled with errors and inconsistencies” and asks the court to rule in favor of the defense.

Stay tuned for the court’s decision.

Thank you to Jim Joyner (Integra Benefits Consulting LLC) for alerting us to the parties’ post-trial filings.

Extra: The parties’ briefs are available as free downloads here.

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