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Employee Stock Ownership Plans

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Several court cases involving Employee Stock Ownership Plans (ESOPs) are moving forward to trial. Brundle v Wilmington Trust; Chesemore v. Fenkel v. Alliance Holdings; Perez v. Cactus Feeders, Inc.; and Perez vs. First Banker’s Trust; just to name a few.

In most of these cases, the Department of Labor has alleged the price paid for the ESOP was in excess of fair market value. In the Brundle case, the company was sold for 40% less than the ESOP was appraised just seven months prior to the sale. An ESOP appraisal should not only be accurate arithmetically, but it should make sense economically. Are the forecasts aggressive relative to historical performance? Can the company support the debt  resulting from the ESOP transaction? Did the appraiser adequately document the risks? In other cases, the ESOP purchased 100% of the stock and paid a “control” value, but real control remained with the selling shareholders. ESOPs can be a wonderful exit planning vehicle for private business owners. But the structure of the deal needs to make economic sense.

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