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.
Business Valuation Case Law Yearbook, 2023 Edition
January 2023 PDF, Softcover (195 pages)
BVR (editor)
Business Valuation Resources, LLC
Mekhaya v. Eastland Food Corp.
The plaintiff pleaded a statutory claim for shareholder oppression. In October 2018, Mekhaya was fired from his position at Eastland, where his salary of $400,000 per year included an implied dividend. The implied dividend was also included in the salaries of the other shareholders, all relatives of Mekhaya. The defendants filed a motion to dismiss, which the district court granted. The plaintiff appealed. He noted that, after his removal, they paid themselves excessively high salaries and refused to pay him dividends, thus frustrating his expectations as a shareholder. The Appellate Court of Maryland disagreed with the decision of the trial court.
Maryland Court of Appeals Reverses Dismissal of an Oppression Claim—Finds There Could Be Disguised Dividend Issue
The plantiff pleaded a statutory claim for shareholder oppression. In October 2018, Mekhaya was fired from his position at Eastland, where his salary of $400,000 per year included an implied dividend. The implied dividend was also included in the salaries of the other shareholders, all relatives of Mekhaya. The defendants filed a motion to dismiss, which the district court granted. The plaintiff appealed. He noted that, after his removal, they paid themselves excessively high salaries and refused to pay him dividends, thus frustrating his expectations as a shareholder. The Appellate Court of Maryland disagreed with the decision of the trial court.
BV News and Trends November 2022
A monthly roundup of key developments of interest to business valuation experts.
Furrer v. Siegel & Rouhana, LLC
A name attorney in a Maryland law firm withdrew after having his license suspended. He sued the firm for compensation for his 26.5% interest in the firm. The firm countersued for damages related to his mistreatment of client accounts. The trial court determined a value of his interest and also determined damages that the attorney owed the firm for his mistreatment of client accounts. The appellate court affirmed the damages but remanded the valuation of the 26.5% interest.
Maryland Appellate Court Remands for Valuation of Withdrawing Member’s Interest in Law Firm and Affirms Damages Award
A name attorney in a Maryland law firm withdrew after having his license suspended. He sued the firm for compensation for his 26.5% interest in the firm. The firm countersued for damages related to his mistreatment of client accounts. The trial court determined a value of his interest and also determined damages that the attorney owed the firm for his mistreatment of client accounts. The appellate court affirmed the damages but remanded the valuation of the 26.5% interest.
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.
Expert can’t testify regarding legal and state of mind opinions
In a case in Delaware Chancery Court concerning breach of fiduciary duty surrounding an acquisition, a well-known expert has had the court partially exclude his testimony.
Manbro Energy Corp. v. Chatterjee Advisors, LLC
The primary focus of this case was cross-motions for summary judgment on issues dealing with fiduciary duty and implied covenant of good faith and fair dealing. A final issue, of importance to valuation experts, was a motion to exclude the testimony of the plaintiff’s valuation expert, which the court denied.
U.S. District Court (New York) Denies Motion to Exclude Expert Witness
The primary focus of this case was cross-motions for summary judgment on issues dealing with fiduciary duty and implied covenant of good faith and fair dealing. A final issue, of importance to valuation experts, was a motion to exclude the testimony of the plaintiff’s valuation expert, which the court denied.
Estate attorney sued over alleged undervaluation
The matriarch of a family business in Hawaii had four children, two of which were involved in the business.
In re Columbia Pipeline Group
“In plaintiffs' action against an energy company for aiding and abetting alleged breaches of fiduciary duty by the officers of a pipeline company, the court granted a motion in limine to exclude an expert's report under Del. R. Evid. 702(a) because it expressed a legal opinion on whether the fiduciaries' conduct was reasonable. [Also], [t]he expert report impermissibly expressed opinions about state of mind, which were factual determinations for the court to make. [Finally] [t]he expert offered impermissible opinions about whether the parties believed their agreement was breached, because he interpreted the agreement using extrinsic evidence.”
Expert Excluded for Offering Legal and State of Mind Opinions in Delaware
“In plaintiffs' action against an energy company for aiding and abetting alleged breaches of fiduciary duty by the officers of a pipeline company, the court granted a motion in limine to exclude an expert's report under Del. R. Evid. 702(a) because it expressed a legal opinion on whether the fiduciaries' conduct was reasonable. [Also], [t]he expert report impermissibly expressed opinions about state of mind, which were factual determinations for the court to make. [Finally] [t]he expert offered impermissible opinions about whether the parties believed their agreement was breached, because he interpreted the agreement using extrinsic evidence.”
Cellular Telephone: An Interesting Decision for Valuation Practitioners
A recent Delaware decision in a breach of fiduciary duty case awarded more than triple the amount originally paid to partners who were squeezed out of their collective 1.881% interest in a partnership. Several aspects of this decision are of particular interest to valuation practitioners, especially those whose practice includes litigation services. The case is: In Re Cellular Tel. P’ship Litig.; 2022 Del. Ch. LEXIS 56 (Cellular).
Delaware Chancery Case on Shareholder Dissent Likely to Raise Eyebrows
A practitioner’s commentary on the Cellular case focuses on the tax-affecting issues in the case.
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.
Delaware Chancery rejects partnership valuation in a freeze-out
In a coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, the court found that AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price.
Sullivan v. Loden
In this malpractice case against an estate attorney, the attorney was denied a summary judgment. The primary issue related to the attorney’s valuation of stock of a family business that was gifted to two of the four children of the decedent. While an “equalization payment” was made to each of the two remaining children, one of these two sued the attorney for both breach of fiduciary duty and for undervaluing the stock gifted, resulting in an underpaid equalization payment.
Estate Attorney Is Denied a Summary Judgment for Alleged Incorrect Valuation of Gifts of Stock—Malpractice Case Proceeds
In this malpractice case against an estate attorney, the attorney was denied a summary judgment. The primary issue related to the attorney’s valuation of stock of a family business that was gifted to two of the four children of the decedent. While an “equalization payment” was made to each of the two remaining children, one of these two sued the attorney for both breach of fiduciary duty and for undervaluing the stock gifted, resulting in an underpaid equalization payment.
In Re Cellular Tel. P’ship Litig.
In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.
Delaware Chancery Court Rejects Partnership Valuation in a Freeze-Out as Unfair to Minority Partners
In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.
Silver lining to Vinoskey ESOP appeal decision
In the well-publicized Vinoskey ESOP case (our latest coverage is here), the appellate court affirmed the district court in deciding that the company owner had extensive knowledge about the company and its prior valuations, and, thus, it was plausible to infer that “something was off.”