Initial Guidelines for ESOP Trustees and ESOP Valuations

Monday, September 29, 2014

The U.S. Department of Labor has a 2014 initiative to closely examine and scrutinize ESOP valuations. The U.S. government is increasing their scrutiny of business valuations of ESOPs (Employee Stock Ownership Plan) within sponsoring companies as a result of the inflated values and per share discrepancies in values in recent years.  The Labor Department is currently involved in 15+ lawsuits, most of them involving business valuations as the central issue in dispute.  The claims include deliberate inflation of values harming the ESOP Plan and the participating members of the plan.




A business valuation is an important part of an ESOP Plan.  A business valuation is required when the ESOP Plan is established and thereafter on an annual basis to determine the per share v

alue of the ESOP Plan ownership in the sponsoring company to determine the repurchase price of an employee's shares upon retirement, departure or death.




There are expected to be new tougher rules proposed on independent valuators who prepare business valuations of ESOP Plans in sponsoring companies.  Currently there are no minimum qualifications for valuators who value ESOP Plans or specific guidance or rules related to how the valuation should be performed.




Many valuators are certified and members of a national valuation standards organization such as the National Association of Certified Valuators and Analysts (NACVA), American Society of Appraisers (ASA) or American Institute of CPAs (AICPA).  These organizations require years of experience and stringent testing requirements to become certified and obtain a valuation credential.  Additionally, these organizations require members to satisfy ongoing continuing education requirements to maintain the credentials.




If you are an ESOP company, what does this mean for you?




Examining the recent court cases, there is guidance being given to trustees with a fiduciary duty to the ESOP Plan and plan participants as well as to the financial experts.  Some of the findings have been extracted below from various court cases including:




  • A trustee has a duty to seek independent advice where he lacks the requisite education, experience and skill, yet the trustee must make an independent decision based upon the advice sought.



  • ERISA provides a statutory exemption if a sale or acquisition is for adequate consideration. Adequate consideration is defined to be the fair market value of the asset.  The standard of value is not investment or any other value.



  • A trustee has a duty to make an independent inquiry of the value on behalf of the plan participants.  What is important is the process engaged in to reach a decision.  Did a trustee act with care, skill and diligence that a prudent person would take in a similar situation, with the same degree of familiarity of the facts and with the similar objectives?  Were the appropriate methods applied to determine the per share value of the ESOP Plan's interest? 



  • The trustee must investigate the expert's qualifications and experience with valuing ESOP companies, provide the expert with complete and accurate information and make certain that reliance on the expert's advice is reasonably justified under the circumstances.



A trustee of an ESOP in a sponsoring company that follows these guidelines will have an easier time demonstrating that a prudent process was implemented when determining whether to accept a value provided by an independent valuation firm.