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).
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.