Some takeaways on the new proposed adequate consideration regulations noted below. Comments do not predict any revisions by the Trump administration, but the DOL did a credible job in the preamble discussion in terms of rationalizing its positions.
1. The 1988 proposed regulations have been withdrawn officially. So it would be very difficult to argue reliance on them in future disputes/litigation.
2. It will be more challenging to minimize a discount for lack of marketability based on the put option rules. The DOL notes that the put option belongs to the participant and not the plan, and fair market value is determined based on the plan’s ownership. This is a change from the 1988 proposed regulations.
3. It will be harder to justify a control premium. DOL would expect the Trustee to exercise more authority over management and the board. It remains to be seen how many trustees want to do this.
4. The concept of justifying a control premium based on acquiring control in the future per a binding agreement has been eliminated. However, these transactions have diminished greatly.
5. ESOP transactions that are designed so as to minimize stock appreciation will be heavily scrutinized. Preamble references a settlement with a public company involving preferred stock that converted into common upon release based on current value, so that the participants did not receive the benefit of common appreciation based on when the preferred was acquired.
6. In the accompanying proposed prohibited transaction exemption safe harbor for ESOP acquisitions, indemnification of both the trustee and independent appraiser will be prohibited. Not part of the proposed adequate consideration regulations, but a reflection of how the DOL views some ESOP advisors. This view is reflected in the preamble to the proposed regulations.
