Over the years, employee stock ownership plans (ESOP) have evolved in many ways. Currently, ESOP transactions began to resemble traditional M&A transactions including financial structures, warrants and market rate sub-debt. In a recent presentation at the NCEO Employee Ownership Conference, Allison Wilkerson discusses current marketplace trends in structuring ESOP transactions, including the importance of pre-transaction structure analysis and post-transaction planning. Allison also goes over the beneficial tax planning opportunities associated with ESOP transactions.
Though the Supreme Court’s 2014 unanimous ruling in Fifth Third Bank v. Dudenhoeffer announced the Employee Retirement Income Security Act (ERISA) standards for stock valuation in the context of a large public employee stock ownership plan (ESOP), the vast majority of ESOPs are still grappling with valuation issues. ESOPs that hold stock of closely-held corporations—approximately 90% of all ESOPs— remain almost unaffected by Dudenhoeffer’s valuation discussions, and face continued scrutiny by the Department of Labor (DOL). Appraisal of closely-held stock is an inexact science that involves an inherent level of uncertainty in assessing a variety of potential fact patterns.
This article summarizes valuation issues in acquisitions of closely-held corporation stock by ESOPs in the context of Perez v. Bruister, a recently decided Fifth Circuit case. The case stressed the importance of ‘‘process’’ in valuation determinations being utilized for acquisitions of a corporation’s stock by an ESOP. In reviewing the case, this article provides a detail of the process that should be followed to ensure consideration of the appropriate factors by fiduciaries in reviewing valuations for ESOP transactions. The article concludes with a discussion of guidance provided by the court in Bruister that may be instructive as to best practices for ESOP fiduciaries charged with establishing the value to be used by an ESOP holding shares of stock of a private company.
On January 25, 2016, the Supreme Court of the United States issued a per curiam opinion in Amgen Inc. v. Harris, holding that the Amgen, Inc. employees who filed suit after the value of the employer stock in which they had invested dramatically decreased, failed to sufficiently plead a breach of fiduciary duty claim under ERISA in light of the Court’s decision last term in Fifth Third Bancorp v. Dudenhoeffer.
On February 2, 2015, the White House released its Fiscal Year 2016 Budget, which includes a number of tax reforms targeting retirement savings. The provisions, if enacted as presented, would have a significant effect on current retirement-related tax incentives.
ESOPs have long provided an exit strategy for owners of privately held businesses and a platform for management buyouts. Mergers and acquisition (M&A) advisors increasingly look to leveraged ESOPs to accomplish both conventional stock and asset acquisitions.
Once an ESOP company decides to pursue an acquisition opportunity, it will generally structure in one of three ways. As more fully described in the following article, the acquiring company will (1) buy the stock or the assets of the target division or company; (2) merge with the target; or (3) have the target create a new ESOP, sell the target to the newly created ESOP, and then merge the ESOP that purchased the target with the acquiring company’s existing ESOP.