Defense expert testimony supports ESOP valuation and fairness opinions

A recent ESOP decision involving allegations of breach of fiduciary duty and engaging in a prohibited transaction turned on whether the ESOP trustee’s financial advisor had performed proper due diligence and issued defensible fairness and valuation analyses.

Veteran experts for both sides testified at trial about the ESOP advisor’s performance. The court relying on “credible and persuasive” defense testimony found no more than fair value was paid in the transaction.

The transaction involved the subject company’s purchase of all of the outstanding shares of its stock held outside its employee stock ownership plan. The purchase was part of a tender offer transaction that left the company 100% ESOP-owned. The defendants held non-ESOP shares and initiated the transaction. The company eventually was forced into Chapter 11 bankruptcy.

The case had interesting wrinkles in that the company board, wanting to avoid conflicts of interest, had hired an independent trustee to oversee the transaction. The trustee retained a nationally recognized valuation firm to assess the fairness of the transaction to the ESOP.

Moreover, because the transaction involved the issuance of warrants, the company, not the ESOP, bought the non-ESOP shares. No ESOP assets were in play.

The defendants argued this fact meant they did not engage in a prohibited transaction as defined under the applicable statute. Ultimately, the court found there was “at least an indirect use of plan assets for the benefit of a party in interest” within the meaning of the statute. But it also found the defendants had an affirmative defense in that they showed they paid adequate consideration in the transaction.

To read more about the valuation expert testimony, click here.