RealityCheck

The facts stated that the shares would be repurchased by the company at the 12/31/2024 valuation and the money market investment fact doesn’t lead to the conclusion that the shares will be recycled. Confusing recycling within the plan (or whatever technical term is appropriate) with a distribution of shares from the ESOP to the participant allowing the employer to repurchase the shares based on the last valuation is not correct. Generally a distribution requires participant consent. Here the facts are that, if the participant does not consent to a distribution, his shares will be cashed out. This will happen either by the company purchasing the shares based on a stale valuation (per the facts) or, as ESOP Guy guesses, by using cash in the ESOP enabling the plan administrator to reallocate cash and stock between the accounts of active and inactive participants (those who have terminated employment). To do this before 12/31/2025, the plan administrator would need the discretion to declare a special plan valuation date a short time before then based on a stock valuation that is almost a year old. I wouldn’t hazard a guess about how the plan document is drafted here except to note that this may be key to the participant’s situation. Now if the employer was going to do this based on the 12/31/2025 valuation, then the participant would be stuck.

It may be productive to speak to an attorney on this. Generally, the employer may buy the stock from the ESOP based on a valuation as of the date of the transaction. Otherwise the purchase does not meet the requirements for an exemption from the prohibited transaction rules. So there may be a prohibited transaction violation if the purchase is in December, 2025 based on the 12/31/2024 valuation. In contrast, if the employer buys the stock from the participant after it has been distributed to him under the put option rules, the last valuation can be used (generally). Also, many are of the view that the money market as the only investment is not prudent. This is getting some attention in the ERISA litigation world.

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 The 1988 proposed regulations have been withdrawn officially.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.