Termination of an ESOP / Valuation of shares in the ESOP, how this should be determined?

[eglynn]

I am trying to be discrete about how our Company's ESOP was terminated, two years ago and I have some new information and I need some answers and advisement. Here are the facts:

1. 110 employees of my company held ESOP shares resulting in ownership of 49% of the company

2. We incurred valuation every year for the share value. The last valuation we received was for total for $3.1 million dollars for the 49% of the company

3. The President of the Company bought out the owner's 51% of the company. We attempted to find out what the purchase price price was and we were told that it was confidential. We believe the owner received between $18 - 25 $million dollars for his 51% of the company.

4. In the industry that we work in company's are sold typically for 2 x the sales revenue. At the time of owners buyout, we were at $30 million in sales revenue, current sales revenue is $45 million dollars.

5. Soon after the owner was bought out, we were told by the President of the Company the ESOP was being terminated and told we had to sell the stock back to him for the $3.1 million dollars for the 49%

6. We had no lawyer represent us

We had no independent valuation done to represent fair market value at the

time of the stock buy back from the President / Owner.

If the owner received $18 million dollars for his 51% shares how is it we received $3.1 million dollars for our ESOP 49% shares?

Can someone clarify this. Is this legal and does this follow ESOP guidelines??

NEED HELP / ALOT OF US ARE HURTING IN OUR RETIREMENT.

[Lou S.]

No independent valuation is a red flag. Also how close is the $3.1M to the value reported on the prior Form 5500? That would be on your Summary Annual Report. You can also look up Form 5500 on the DOL website. If the Plan showed a huge loss in the year of termination, I would be concerned.

I would recommend contact an ERISA attorney with your questions.

[RLL]

The 51% owner should not have sold control of the company without offering a similar buyout opportunity to the 49% owner (the ESOP). If the "owner" received $18 million (or more) for his 51% interest, the ESOP's 49% is worth substantially more than $3.1M (it's likely worth over $17M). In light of the recent stock purchase by the President, it doesn't take an independent valuation to determine that. And it appears that both the 51% owner and the President are/were fiduciaries of the ESOP.

Based on these facts, this looks like somewhat egregious violations of ERISA's fiduciary provisions, including prohibited transactions. An ESOP lawyer with litigation experience should be contacted. Or take this situation to the local office of the Department of Labor. The ESOP and its participants could be entitled to an additional $14M (or more).

[ESOP Guy]

Who was the trustee of the ESOP?

How do you know there wasn't an independent valuation for the stock?

It isn't obvious that you should be paid the same as the 51% owner. There is always a discount for minority interests.

I am not saying you don't have a valid issue but based on what you have given it isn't obvious you have an issue either.

I think you should start by asking simple questions of the people involved with the termination and sale of the stock. I would ask who was the trustee overseeing the chain of events. I would then ask that person/organization what steps they took to determine the sales price was FMV.

[Lou S.]

Who was the trustee of the ESOP?

How do you know there wasn't an independent valuation for the stock?

It isn't obvious that you should be paid the same as the 51% owner. There is always a discount for minority interests.

I am not saying you don't have a valid issue but based on what you have given it isn't obvious you have an issue either.

I think you should start by asking simple questions of the people involved with the termination and sale of the stock. I would ask who was the trustee overseeing the chain of events. I would then ask that person/organization what steps they took to determine the sales price was FMV.

If the sale was indeed $18M then even with a "discount" $3.1M is grossly undervalued.

What we don't know is the actual purchase price of the 51% stake, the $18M appears to be a "best guess" of the participant.

[Doghouse]

https://www.nceo.org/articles/freezing-terminating-esop

This article is interesting in that it suggests that upon plan termination, some of the discounts that would normally apply (for marketability, minority interests, etc.) should possibly no longer apply.

[ESOP Guy]

Who was the trustee of the ESOP?

How do you know there wasn't an independent valuation for the stock?

It isn't obvious that you should be paid the same as the 51% owner. There is always a discount for minority interests.

I am not saying you don't have a valid issue but based on what you have given it isn't obvious you have an issue either.

I think you should start by asking simple questions of the people involved with the termination and sale of the stock. I would ask who was the trustee overseeing the chain of events. I would then ask that person/organization what steps they took to determine the sales price was FMV.

If the sale was indeed $18M then even with a "discount" $3.1M is grossly undervalued.

What we don't know is the actual purchase price of the 51% stake, the $18M appears to be a "best guess" of the participant.

I admit the discount would seem very large. My point was primarily that it isn't obvious that the 49% owners would get the same as the 51% owners in every case. A 51% owner already has control of the company and doesn't need to buy more shares to control the company. So there could be a discount.

I stand my my basic idea start by asking questions about how the process was done. If there was an outside trustee (which any more every lawyer recommends just for these questions) then the participants in the ESOP were in fact represented by someone who had a fiduciary obligation to them. That makes it less likely the price was a problem.

If it turns out the trustee for the sale was a corporate officer then there is a stronger case to follow up on the price.

[ScrewedbyDan]

Great call E.G. This case has now been under investigation for almost two years.  When ever there is a question about ESOP law get your facts together and Contact DOL.  The Boston division is handling this case and Are doing a fantastic job.  

This is a whole new method of ESOP fraud.  Typically stocks are overvalued at the time of stock sales.  These guys had a new approach.  Buy the owners shares and then force out employees for pennies on the dollar.  Employees were told if they asked what the sales price was from the owner to the president of the company they would be terminated.  Employees who refused to sell their stock were harassed and made to feel like their jobs were in jeopardy.  The former owner had promised to sell 100% to employees on several occasions.  12 years of emails on employees pc's and laptops and hard drives were scrubbed, of any and all ESOP communications.

The buyout was rushed because profits were budgeted to skyrocket, Their timing was perfect the new owner keeping those profits and paid as low as 10% of what the stock was worth.

This was a very well planed scheme.  Oh yes the trustee has been promoted to the Vice President of the company. 

New sources have revealed the owner received as much as 43 million for his 51% and yes employees received 3.3 million for 49%.

[ESOP Guy]

I am glad you think the DOL is helping. 

I am still curious do you know who the trustee that made the critical decisions at the time of the sale? 

[ScrewedbyDan]

Yes, he was at the time a senior member of the management team and is now the VP.  When the closing of the ESOP was announced he disappeared for two weeks.  When he returned he had nothing to say on the matter.  DOL is aware of all relevant facts. They are on it, we employees are very impressed with DOL.

[acer]

UPDATE      12/30/2018  /    ESOP HAS BEEN UNDER INVESTIGATION BY  DOL / EBSA SINCE 9/01/2016  AND HAS FINISHED THE INVESTIGATION AS OF 12/20/2018

1.  The DOL investigation has been passed on to the Office of Solicitors of DOL as of 12/21/2018

2.  Question arises how will the Office of Solicitors handle the finished investigation??

[ESOP Guy]

Well this explains the slowness regarding the termination.  No way anyone would agree to terminate and close the plan when it was under audit.   That mystery is now explained.

You will just have to wait to see what the DOL does. 

[ejg2553@gmail.com]

On 12/31/2018 at 11:15 AM, ESOP Guy said:

Well this explains the slowness regarding the termination.  No way anyone would agree to terminate and close the plan when it was under audit.   That mystery is now explained.

You will just have to wait to see what the DOL does. 

On 12/31/2018 at 11:15 AM, ESOP Guy said:

Well this explains the slowness regarding the termination.  No way anyone would agree to terminate and close the plan when it was under audit.   That mystery is now explained.

You will just have to wait to see what the DOL does. 

2

[ejg2553@gmail.com]

Update, 

We secured a law firm in May of 2019 to sue the company, there were 4 plaintiffs, in the lawsuit we asked the Federal Court to certify the lawsuit as a class action for the remaining 150 ESOP participants. We got word recently it is confirmed as a class action for ERISA violations. The DOL has processed their investigation also, over to the trial lawyers. It has been four years since the investigation started. We have had ESOP participants die during this process, some of their families are financially in tough shape because of how this company behaved. They abused the ESOP federal program and this is the result. Be advise inform yourself, ask questions, make sure these companies follow the law, or you end up like us, out $40 million dollars

[ESOP Guy]

It is sad to hear that people didn't do the right thing here.   ESOPs as a general rule are wonderful plans.   I have over the decades seen many of them make the employees rich and secure great retirements. 

[ejg2553@gmail.com]

FYi, 

The DOL filed last week against ßthe company in federal court, over 25 ERISA violations, ie., fiduciary malfeasance, Trustee violations, bottom line they got caught stealing $40 million. These are sad and souless owners who took advantage of the working man.