Coordination of Closing and Valuation

[Guest Babs]

Shareholder wants to sell additional stock to ESOP. Shareholder wants to make sale contract "effective" as of 1/1/03, (note retroactive date) but "close" on the sale on 6/01/03. Sale price is to be the valuation determined on 1/1/03. Expert advisors feel that this transaction can be effected if an update of the valuation is done as of 06/01/03 and the valuation price is equal to or greater than the purchase price. Is this right???

Also, since a valuation is done using historical data and it takes time to finish a valuation, mechanically, how do you close a transaction at a price that does not exceed the fair market value???? Won't any valuation be finished several weeks after a closing????? In the practical world how is this handled????

[RLL]

Hi Babs ---

Under ERISA sections 408(e) and 3(18), the purchase price paid by the ESOP may not exceed "adequate consideration" (appraised fair market value, in the case of a closely held company) on the purchase date (the date the ESOP acquires ownership of the shares). It is quite common for ESOP fiduciaries to receive updated valuation opinions on (and as of) the date that an ESOP transaction closes....experienced ESOP appraisers/financial advisers have no real problem in doing this.

Making a sale "effective" as of a prior date is irrelevant for this purpose. The applicable date for determining compliance with the "adequate consideration" requirement is the date of the ownership transfer. There is no problem under ERISA if the purchase price paid by the ESOP is less than "fair market value"....ESOP fiduciaries are supposed to negotiate for the lowest possible purchase price.