The Corrections: In 'Chesemore,' Court Shows How to Utilize Flawed Appraisals
Chesemore v. Alliance Holdings, Inc., 2013 U.S. Dist. LEXIS 80969 (June 4, 2013)
Last summer, a federal court ruled on ERISA liability in an ESOP-leveraged buyout gone bad. The transaction was notable for its conflicts of interest and a valuation resulting from “questionable judgments” and “lack of independent scrutiny."
Backstory. In 2002, the defendants bought a self-storage company for $24 million and then merged the company's ESOP plan into its own and gave stock interests to management insiders on both sides of the deal. Five years later, alert to trouble in the real estate market, they wanted to sell it for around $50 million but found no takers. Offers in 2006 ranged from $32 million to $41 million. Consequently, they orchestrated a sale to a newly formed ESOP, which, when all was said and done, paid more than $38 million for the company's common equity. The company took on $36 million in debt and ultimately collapsed.
Recently, the court ruled on damages and remedies. To determine a reasonably realistic fair market value of the company in 2007, it made extensive corrections to two contemporaneous appraisals and arrived at a common equity value of $30 million. The court's estimate meant the ESOP had overpaid by over $8 million.