Fairness Opinion for ESOP

[Guest AJJ-EB]

An employer is in the process of establishing an ESOP. The trustee has hired an appraisal company. The appraisal does not contain a fairness opinion. The bank is insisting on a fairness opinion. The trustee has taken a neutral position, he could have or not have it.

ERISA does not require a fairness opinion, but is it standard for an appraisal to have a fairness opinion when valuing an employer's stock for an ESOP deal?

Thanks.

[RLL]

Hi AJJ-EB ---

Although a fairness opinion is not required by ERISA, it may be desirable to help support a fiduciary decision that an ESOP transaction is "solely in the interest of participants" under ERISA section 404(a)(1). This would be more important if the trustee is not totally independent of the company and the selling shareholder(s). In addition, if this is a more complex transaction involving any elements such as multiple buyers, multiple classes of stock, a high degree of leveraging, payment of a control price, compensation issues, etc., a fairness opinion should be obtained.

A fairness opinion will help to support that the purchase price and other financial terms of the transaction are "fair" to the ESOP in light of the specific facts and circumstances surrounding the proposed transaction. Note that the ESOP's payment of a price that the appraiser says is "not more than fair market value" doesn't automatically make the transaction "fair" to the ESOP.....fair market value is just one element of financial fairness.

I assume that the trustee is the fiduciary that will make the decision for the ESOP to purchase the stock (including determining the price that the ESOP will pay). Who is the trustee? You refer to the trustee as "he".....so perhaps we are not dealing with an independent trustee here.

Presumably the "bank" is the lender, which wants greater assurance that the transaction would withstand scrutiny under ERISA's fiduciary standards. If this is truly a "fair" deal for the ESOP, there should be no real problem in obtaining the fairness opinion....which very well may be obtained from the appraiser.

Look at this as just another cost of securing the financing from this bank. It also provides an added level of "insurance" for all parties to the transaction.

[Kirk Maldonado]

I wholeheartedly concur in RLL's remarks.