DOL ESOP valuation regs coming by year-end
The Department of Labor (DOL) will issue long-awaited guidance on ESOP valuations by the end of this year, according to a blog post from the National Center for Employee Ownership (NCEO).
Takeaways From ASA’s ESOP Virtual Conference
ESOP valuation basics, sell-side transactions, issues with mature ESOPs, and common critiques with valuations in litigation were the topics of discussion at ASA ESOP Virtual Conference.
Valuation Implications of the Changing ESOP Litigation Landscape
The tide has started to turn with respect to litigation over ESOP valuations, speakers reported at the recent ASA ESOP Virtual Conference. There has been a major court victory and pressure from the ESOP and valuation profession, and now the DOL has committed to moving forward—hopefully— with long-awaited regulations on the valuation of company shares to be bought by an ESOP.
Tide has turned (somewhat) for ESOP valuations
From a regulatory standpoint, the tide has turned to some degree with respect to ESOP valuations, speakers said at the ASA’s ESOP Virtual Conference on June 20.
Bennetti v. Oxford Restructuring Advisors LLC (In re Community Providers of Enrichment Services AZ Liquidating, Inc.)
Employee members of an ESOP had their claims against the debtors, based on cash option rights in an ESOP, denied. The debtors were not obligated to employees under the ESOP. The ESOP needed only to provide distributions in cash. There was no right of payment from the debtors. The U.S. Bankruptcy Appellate Panel for the 9th Circuit affirmed.
Bankruptcy Appellate Panel Denies Employee Members of ESOP Claims Against Debtors
Employee members of an ESOP had their claims against the debtors, based on cash option rights in an ESOP, denied. The debtors were not obligated to employees under the ESOP. The ESOP needed only to provide distributions in cash. There was no right of payment from the debtors. The U.S. Bankruptcy Appellate Panel for the 9th Circuit affirmed.
Attorney gets Daubert challenge over ESOP employment agreements
In a federal court in Georgia, an employee benefits lawyer prepared a report and was deposed regarding the process by which employment agreements were negotiated as part of a transaction involving an ESOP.
DOL—finally—agrees to provide regs on ESOP valuations
At long last, the door has been opened for the Department of Labor (DOL) and the valuation profession to work together to develop guidance on ESOP valuations.
Gamache v. Hogue
In a motion related to a lawsuit asserting ERISA violations under the ESOP plan for the defendants, including the Administrative Committee of Technical Associates of Georgia Inc. ESOP and certain individuals, the defendants moved to exclude the testimony and report of the plaintiffs’ expert, Jeffrey Krenzel. Krenzel was an “employee benefits lawyer” with 21 years’ experience, including eight years as a partner in a firm specializing in ESOP transactions. The court determined that Krenzel was qualified and that his opinions and report were reliable and helpful to the trier of fact.
U.S. District Court in Georgia Allows Testimony of Attorney as to ESOP Transaction Process for Employment Agreements
In a motion related to a lawsuit asserting ERISA violations under the ESOP plan for the defendants, including the Administrative Committee of Technical Associates of Georgia Inc. ESOP and certain individuals, the defendants moved to exclude the testimony and report of the plaintiffs’ expert, Jeffrey Krenzel. Krenzel was an “employee benefits lawyer” with 21 years’ experience, including eight years as a partner in a firm specializing in ESOP transactions. The court determined that Krenzel was qualified and that his opinions and report were reliable and helpful to the trier of fact.
The Walsh v. Preston ESOP Case—Is It a Victory or an Escape?
Commentary from BVR’s legal editor on an important ESOP valuation case.
ASA sets date for ESOP conference
Mark your calendars for June 20 for the ASA’s ESOP Virtual Conference.
Novosel v. Azcon Inc.
In this ESOP-related case, the plaintiff (an ESOP plan beneficiary) raised three complaints, two of which were primarily the result of the performance and use by the ESOP of an interim valuation date for measurement of the value of her shares for her retirement payments made over time. There was also discussion regarding the interim value determined and whether a PPP loan of $1.2 million should have been considered. The defendants moved for dismissal on the first two accounts. The court denied the dismissal of the first complaint in regard to assertions that the use of the interim valuation date was arbitrary and capricious. It also allowed the filing by the plaintiff of a second amended complaint. The court granted the defendants’ motion to dismiss the plaintiff’s complaint regarding the asserted cutback of accrued benefits.
ESOP Case Motions Revolve Primarily Around an Interim Valuation and Consideration of a PPP Loan
In this ESOP-related case, the plaintiff (an ESOP plan beneficiary) raised three complaints, two of which were primarily the result of the performance and use by the ESOP of an interim valuation date for measurement of the value of her shares for her retirement payments made over time. There was also discussion regarding the interim value determined and whether a PPP loan of $1.2 million should have been considered. The defendants moved for dismissal on the first two accounts. The court denied the dismissal of the first complaint in regard to assertions that the use of the interim valuation date was arbitrary and capricious. It also allowed the filing by the plaintiff of a second amended complaint. The court granted the defendants’ motion to dismiss the plaintiff’s complaint regarding the asserted cutback of accrued benefits.
Another big win for ESOP valuations vs. the DOL
Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company.
Walsh v. Preston
In this ESOP ERISA case, the government (plaintiffs) (Secretary of Labor) alleged claims against the defendants, Robert N. Preston and TPP Holdings Inc. (and nominally against its ESOP) for: (1) breach of fiduciary duties; (2) engaging in prohibited transactions; and (3) co-liability of defendants. In a lengthy opinion, the court determined that the defendants did breach fiduciary duties and did engage in prohibited transactions. It further decided that there was no co-liability among the defendants, but it did not allow an offset of payments on debt of TPP Preston personally made. In determining FMV, the court did not allow a minority interest discount. In so doing, the resulting damages determined were minimal.
U.S. District Court Decides Some Issues for Government and Some for Defendants But Very Little in Damages in an ERISA ESOP Case
In this ESOP ERISA case, the government (plaintiffs) (Secretary of Labor) alleged claims against the defendants, Robert N. Preston and TPP Holdings Inc. (and nominally against its ESOP) for: (1) breach of fiduciary duties; (2) engaging in prohibited transactions; and (3) co-liability of defendants. In a lengthy opinion, the court determined that the defendants did breach fiduciary duties and did engage in prohibited transactions. It further decided that there was no co-liability among the defendants, but it did not allow an offset of payments on debt of TPP Preston personally made. In determining FMV, the court did not allow a minority interest discount. In so doing, the resulting damages determined were minimal.
Warranting Further Discussion: Why the Use of Financing Warrants in ESOP Transactions Benefits American Workers
The leveraged Employee Stock Ownership Plan (ESOP) structure was created by US Congress to enable American workers to gain an equity interest in their companies without using their own funds. A critical component in the financing of leveraged ESOP transactions is a “warrant,” which enables corporate sponsors of ESOPs to access the financing necessary to facilitate purchases of company stock by ESOPs. Warrants also afford substantial benefits to ESOPs by providing downside risk for ESOP ...
Conference Recap: ESOP Valuations at a Crossroads
A key takeaway at the inaugural ESOP Virtual Conference hosted by the American Society of Appraisers was that we may be at a crossroads with regard to valuations of employee stock ownership plans (ESOPs). Topics covered included ESOP valuation basics, key issues from recent litigation, ESOP stock purchase transactions, and advanced topics (such as control premiums, repurchase obligations, and synthetic equity).
Takeaways from the ASA’s first ESOP conference
The American Society of Appraisers hosted the inaugural ESOP Virtual Conference on June 21, and here are some notable bits of information we learned.
Couturier v. Comm'r
The Tax Court was asked in this ESOP-related case to approve the taxpayer’s motion for summary judgment. The petitioner contended that the IRS “is precluded as a matter of law from asserting excise tax liability under section 4973” because it did not issue him a notice of deficiency challenging his income tax treatment of the transactions that generated the excess contributions. The motion was denied. The alleged excess contributions were more than $26 million with alleged excise tax of more than $8 million.
Tax Court Denies Taxpayer’s Motion for Summary Judgment Relative to an Excess IRA Contribution Relating to an ESOP Purchase/Sale
The Tax Court was asked in this ESOP-related case to approve the taxpayer’s motion for summary judgment. The petitioner contended that the IRS “is precluded as a matter of law from asserting excise tax liability under section 4973” because it did not issue him a notice of deficiency challenging his income tax treatment of the transactions that generated the excess contributions. The motion was denied. The alleged excess contributions were more than $26 million with alleged excise tax of more than $8 million.
ESOP valuations may be at a turning point
At last week’s inaugural ESOP Virtual Conference hosted by the American Society of Appraisers, the landmark Bowers case was discussed, which could represent a turning point for ESOP valuations.
ASA debuts virtual ESOP conference June 21
The American Society of Appraisers has added a new specialized event to its conference schedule: the 2022 ASA ESOP Virtual Conference on June 21.
DOL proposes change to ESOP prohibited transaction exemption requirements
ESOP appraisers should take note of a proposed rule to amend the Department of Labor (DOL) prohibited transaction exemption procedure, reports the American Society of Appraisers (ASA).