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Valuations Case Report: ESOP Valuations May Be at a Turning Point

January 30, 2023

In this highlighted Business Valuation Resources case report, the tide appears to be turning for ESOP valuation enforcement cases brought by the Department of Labor (DOL). The DOL has over a decade-long history of winning cases involving valuation matters but, in a recent landmark litigation, the court rebuked the DOL for failing to follow standard valuation practices.

This case summary is a reminder that without established regulation, the DOL has been able to “legislate through litigation” using process/settlement agreements. This case essentially brought the DOL’s winning streak to an end and was a welcome outcome for those practicing in the valuation community.

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ESOP Valuations May Be at a Turning Point

In last year’s inaugural ESOP Virtual Conference hosted by the American Society of Appraisers (ASA), the landmark Bowers case was discussed, which could represent a turning point for ESOP valuations.

Here’s the story: For over a decade, the DOL has had a very aggressive enforcement stance and had not lost a major ESOP case on a valuation issue. But its winning streak ended with the Bowers case, which involved many key valuation issues that came up in prior cases as well. As in those cases, the DOL alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards. But the DOL had a long track record of success using its own rules. In a stunning rebuke, the district court ruled against the DOL, stressing that the agency failed to follow standard valuation practices.

The case is “very good news” for the valuation profession, speakers at the ASA conference said, and it is “very helpful” to the ESOP community as well. The case could change the course of litigation, and it also may open the door for the DOL to finalize (at long last) regulations regarding ESOP valuations that were proposed back in 1988 (yes, 1988). Instead of finalizing the regs, the DOL has been “legislating through litigation” and through a series of settlements (process agreements) between the agency and ESOP trustees. Some of the more recent settlements have not been favorable to the DOL, speakers said, so they have not been made public.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and a case analysis and the full opinion are available on the BVLaw platform.

Extra: The testifying valuation experts in the Bowers case discussed details in an article that appeared in Business Valuation Update.

Dan Rosio Partner, Valuation Services
Andy Manchir Partner, Business Valuation & ESOP Services
Dan Sailer Director, Valuation Services

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