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Retiring - Are ESOP shares undervalued?


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There will be a significant number of retirees from the company our company in the next year. The company has a significant amount of Cash on the balance sheet that might not all be included in the valuation. The Company and trustee are unwilling to let anyone else review the valuation report. Is there anyway to dispute the valuation on the basis it is too low? The ESOP owns over 70% of the company, but the CEO and CFO seem to be hiding the cash until after the current round of retirements.

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Do you know who is the trustee of the plan? 

Is it a member of management/board or an outside trustee?  

If it is an outside trustee than I find the idea of what you are saying next to impossible to believe. 

Even if there is an inside trustee I find what you are saying is hard to believe.  

The appraiser will require a set of financial statements from the company. They will want some kind of assurance from the company's CPA the financial statements are accurate.  It might not be a full blown audit of the books but the CPA isn't going to give some kind of assurance on people's word either. 

The simple fact is for your charge to be true it would take a combination of management, an appraiser, trustee and the company's CPA to be not doing their job.  I am not saying it can't happen.  I have worked with ESOPs since the '90s and there are some crazy stories out there but what you are suggesting isn't easy to do.  

You don't have a legal right challenge the appraisal directly.   You have some rights to challenge how your benefits are paid and how much.  You can go to the DOL and file a complaint.   But the most common reaction from a company is going to be to lawyer up.  Those legal fees coming out of the company is going to reduce the cash on the balance sheet and reduce the company's value also.  

I would add the appraisal is a pretty complex process and idea.   There can be discounts for things that most people don't think about- lack of marketability, if the company has risks because one or just a few customers are a very large percentage of total gross revenue for example.  So a price being too low or too high isn't obvious.  You can find legal cases where dueling appraisers come up with some pretty different numbers.  

In all seriousness what makes you think the share price is too low?   What is your baseline to compare that price to?   Why don't you think the cash on the balance sheet isn't included in the valuation?   If the appraiser can see it on the balance sheet they are going to factor it in to the stock price.  

I would add having a lot of retirees and a lot of cash on the balance sheet sounds like good management on the face of it.  The plan sponsor needs to have cash to fund the distributions the retirees are going to be paid.  Is that cash simply a sinking fund for the ESOP repurchase liabilities?   If you go to an ESOP conference they talk about setting up sinking funds to fund distributions all the time.  Based on the very limited few sentences you have written and nothing else I see prudent planning by having a lot of cash on the balance sheet.  

Do you really have solid evidence? 

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I am not an appraiser.  I help companies run their ESOPs from an accounting, regulatory and participant accounting functions.   I work for a Third Party Administrator.  My point is I can't speak completely authoritatively regarding how an appraisal is supposed to work.   In the end it is the appraiser's job to get the fair market value of the stock determined.  

 

I have always understood the cash is in that fair market value like any other asset regardless of why it is on the balance sheet.  Legally speaking nothing stops the company from using the sinking fund's cash to run the company so it is simply an asset.  

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Interesting in that you mention cash in a sinking fund to cover repurchase LIABILITY. So if the company is expecting to shell out half a million dollars, for example, to buy back the shares of upcoming retirees, yes, that cash may be an asset but it is offset by the expected repurchase liability. As EG noted, it's up to the valuation firm to sort out, but the presence of an asset does not necessarily translate into ownership equity.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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3 minutes ago, CuseFan said:

Interesting in that you mention cash in a sinking fund to cover repurchase LIABILITY. So if the company is expecting to shell out half a million dollars, for example, to buy back the shares of upcoming retirees, yes, that cash may be an asset but it is offset by the expected repurchase liability. As EG noted, it's up to the valuation firm to sort out, but the presence of an asset does not necessarily translate into ownership equity.

I get the impression there is some debate in the appraisal community as to how and when to factor  in the fact they company does have a claim on its future cash flow.  We are outside my expertise so I am hesitant to speak in a way that comes across as authoritative.   So yes it needs to be left up to the appraiser.  

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5 hours ago, I need help said:

There will be a significant number of retirees from the company our company in the next year. The company has a significant amount of Cash on the balance sheet that might not all be included in the valuation. The Company and trustee are unwilling to let anyone else review the valuation report. Is there anyway to dispute the valuation on the basis it is too low? The ESOP owns over 70% of the company, but the CEO and CFO seem to be hiding the cash until after the current round of retirements.

I need help, in your question you state that not all the cash may be included in the valuation. You also state that the officers of the company may be hiding the cash. If your suspicions on those points are correct (and I have no way of evaluating them, of course), then certainly the valuation will be wrong, as not even the most ethical and skillful appraiser can appraise correctly based on inaccurate data.

My recollection is that the valuation report is not, at least in those circuits where this has been litigated, a plan "instrument" that is subject to your ERISA document demand right. However, you would certainly get a copy in discovery in any litigation, and the DOL has subpoena powers if it gets involved.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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If management is leaving cash off the balance sheet there are deeper problems than the stock price.  But most companies leaving cash off the balance sheet is hard to do.  The CPA firm might detect it.  They often times have loan covenants to meet and missing cash make that harder.  

 

You better have some good evidence before you go around claiming the balance sheet is materially misstated to a lawyer or DOL.  

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19 hours ago, ESOP Guy said:

If management is leaving cash off the balance sheet there are deeper problems than the stock price.  But most companies leaving cash off the balance sheet is hard to do.  The CPA firm might detect it.  

Might is the important word.  I've seen examples where the "CPA firm" just waves its hands at whatever the owner wants/says, and such review has no integrity.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The money is on the balance sheet, and I have 100% trust in the audit. But the concern is the valuation. The valuation is based on Discounted Cash Flow, but there should be an add for Non Operating Assets, which should include Excess Cash. 

The valuation is not based solely on financial statements. There is significant input from the company. The valuation company is also very reputable. 

The question is could the company come up with some sort of justification to exclude the excess cash from the valuation. So I am not suggesting a vast conspiracy, just that the company might be "spinning" things to the valuation company.

 

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I need help, I think you've probably reached the limit of the help you can get without someone getting full access to documents and financial statements (which may require legal action) and doing a very detailed analysis. Even then, there could be a difference of opinion. ESOP valuations in sales are a frequent issue in litigation. Outcomes of cases depend on facts.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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