Winter 2007


Focus on Employee Stock Ownership Plans

Editors for This Issue: Malcolm R. Hartman and Kelly R. Wright

ESOP Administration Insights

Feature Article:

The ESOP Movement—Perspectives from The ESOP Association Leadership
Malcolm R. Hartman
The ESOP community is a dynamic environment. The convergence of the various financial, business, legal, and political issues adds to the challenge to the individuals and institutions involved with ESOPs. Yet, it appears that the future is bright for ESOPs. And, many observers believe that the ESOP employee ownership movement is the wave of the future of American businesses. As a member of The ESOP Association Board of Directors, Mike Hartman solicited the insights and perspectives from other members of the Board. Hartman asked Steven Voigt, CEO of The King Arthur Flour Company, Inc., and chair of the ESOP Board of Directors about the future and the challenges facing ESOPs. Voigt graciously responded on behalf of The ESOP Association Board of Directors.

ESOP Valuation Insights

The Basic Elements of the ESOP Employer Corporation Stock Valuation Robert F. Reilly
Experienced ESOP valuation analysts recognize that there are ten basic elements to the ESOP employer stock valuation assignment. Experienced valuation analysts will discuss these valuation elements with the client (typically the ESOP trustee) prior to commencing the assignment. In addition, experienced valuation analysts will document these ten basic elements both (1) in the employer stock valuation workpaper file and (2) in the employer stock valuation report. Valuation analysts should be aware of these ten fundamental elements of the ESOP sponsor company valuation assignment. ESOP trustees, ESOP lenders, and other ESOP professional advisers should also be familiar with these ten basic elements of the ESOP employer stock valuation. That way, they will not rely on a sponsor company stock valuation analysis/report that is not appropriate for ESOP purposes.

Ethics Considerations in ESOP Employer Stock Valuations
Robert F. Reilly
Valuation analysts and financial advisers who practice in the ESOP area should be familiar with all generally accepted business/security valuation approaches, methods, and procedures. These valuation analysts and financial advisers should have experience and expertise with regard to ESOP employer stock purchase transactions, employer stock sale transactions, leveraged ESOP financings, transaction fairness opinions, and financing solvency opinions. However, in addition to ESOP valuation and financial adviser technical expertise, these analysts should have a current and constant appreciation for the ethics considerations involved in ESOP employer stock transactions, financings, and regulatory compliance valuations. This discussion will focus on the six “C”s of ESOP valuation and financial adviser ethics considerations.

Current Valuation Issues With Regard to ESOP-Owned Employer Corporation Stock
Robert P. Schweihs and Robert F. Reilly
Independent financial advisers play an important role in many ESOP employer corporation stock purchase, sale, and financing transactions. The financial adviser advises the ESOP trustee with regard to the price and terms of the proposed employer stock transaction. And, the financial adviser assists in negotiations on behalf of the ESOP, helping to ensure that the ESOP participants achieve their maximum economic self-interests. This discussion reviews several current topics with regard to the valuation of ESOP-owned employer corporation stock. This “current issues” discussion is presented from the perspective of the “best practices” that are generally used by ESOP financial advisers.

The Valuation Impact of the Sponsor Company Repurchase Obligations
Chip Brown
The valuation impact of the employer corporation stock repurchase obligation depends on various factors. A sponsor company’s decision on how to repurchase the ESOP participant’s “put” shares (e.g., redeem or recycle) can directly impact the employer stock value. The valuation analyst should have an understanding of the similarities and differences between repurchase methods. Based on that understanding, the analyst can develop a basis to include the repurchase obligation in the valuation analyses, so as to best represent the particular set of employer corporation facts and circumstances.

ESOP Valuation and Financial Advisory Services Bibliography
Charlene M. Blalock
This bibliography lists ESOP-related professional journal articles, books and textbooks, previous Insights articles, and professional association conference presentations and proceedings. These reference materials should be of interest to valuation analysts and to independent financial advisers who practice in the ESOP area. And, these reference materials should also be of interest to ESOP trustees, to ESOP lenders, and to other ESOP professional advisers such as lawyers and accountants).

ESOP Legal and Regulatory Insights

Pension Protection Act of 2006—The Impact on Employee Stock Ownership Plans
David H. Williams, Glenn D. Gunnels, and Dorothy A. Weber
The Pension Protection Act recently signed by President Bush has wide implications for administering retirement accounts. This act focuses on six key reforms aimed at fixing outdated pension laws, strengthening workers’ retirement security, and reducing the prospect of a future multi-billion taxpayer bailout. This discussion focuses specifically on how the Pension Protection Act affects employee stock ownership plans.

ESOP Plan Fiduciary Issues Related to Plan Terminations
Katherine A. Gilbert
This discussion highlights several valuation and administration issues a plan fiduciary faces when an ESOP is terminated. This discussion also describes the role of the ESOP fiduciary in dealing with these plan termination issues. This discussion will also explain (1) the typical reasons why an ESOP plan is terminated and (2) the appropriate parties who should be involved in the ESOP plan termination.

ESOP Fiduciary Insights

ESOP Fiduciary Review of Employer Corporation Stock Valuation Reports
Tracy B. Woolsey and Rachel L. Saxon
ESOP trustees rely on financial adviser’s transaction opinions (e.g., fairness opinions, solvency opinions) and valuation opinions (e.g., fair market valuations and adequate consideration opinions) as important input in a number of trustee decisions. However, ESOP trustees should not naively accept the financial adviser’s opinion. Rather, the ESOP fiduciary should submit the financial adviser’s work to a rigorous due diligence process. This discussion summarizes some of the various factors that an ESOP fiduciary should consider when reviewing an employer corporation stock valuation report. This discussion includes a checklist for ESOP trustees to use in their review of the employer stock valuation report.

Selecting and Monitoring an Investment Adviser for Your Company’s Retirement Plan: A Guide for Company Fiduciaries
Lance T. Studdard Company fiduciaries can include officers, directors, and/or key employees who are involved in selecting investment advisers for their company’s retirement plan. This article discusses issues that a company fiduciary should be aware of when selecting and monitoring investment advisers for retirement plans.

Seventh Circuit Questions an ESOP Trustee’s “Failure to Apply Marketability Discount” in Reversal of Summary Judgment
Bobbie J. Jenkins and John C. Ramirez In the Armstrong v. LaSalle Bank National Association decision on a motion for summary judgment, the trial court found in favor of the defendant trustee’s decision to accept an employer stock valuation that did not include a discount for lack of marketability. However, in this case, the employer corporation had liquidity issues and an aging workforce. And, the ESOP plan allowed departing employees to immediately redeem their employer shares for cash. The plaintiff appealed the unfavorable trial court decision to the Seventh Circuit. While recognizing an ESOP trustee’s discretion in employer stock valuation matters, the Appeals Court reversed the summary judgment decision. The Appeals Court remanded the case back to the trial court for further consideration of the discount for lack of marketability issue.