ESOP RIGHTS / UNDER VALUED

I have been searching for a forum such as this for several months.  I have read some of the threads which have been very helpful.

If I can please provide a short summary, than a list of questions.  Last Spring, I was terminated from a very successful ESOP company that is 100% employee owned.  I worked for the company for over 26 years and held the position of VP.  I was one of the 5 top share holders of the company.   I ran afoul of the company President and CFO when I questioned (when I was asked to sell back shares due to the top heavy rule) the low price of the ESOP shares that I would be paid a few years back and the same situation was to occur in 2019 also.   Some numbers to justify why I question the value:  The ESOP shares, approximately 40 participants, have a total book value of $10 million.  Recent five year sales for the company between $58 - $65 million and there are $10 million + in assets alone if liquidated.  Net profit 15% minimum prior to reinvestment and bonuses annually.

Any help with the following questions would be appreciated:

*  I received as statement indicating how many shares I owned and a dollar amount per share.  What can I do to find out how the shares are valued or have them checked by others?  What rights does an employee have?

* Is it standard / acceptable for the President and the CFO to run the company and the ESOP?  There is no board of directors.  Taking very high annual bonuses and controlling the ESOP seems to be a conflict of interest.

*There is a third party appraiser, but I'm sure they were asked to keep the value low.  

*There is more to the termination in regards to questioning the ESOP direction, are the ERISA employee rights for retaliation termination.  I did not ask a question that I did not feel was permissible per the plan document.

* Are there law firms that are knowledgeable to represent the employee in ESOP disputes.  

I am in an at will state and have met with an attorney, but I am finding out he has very little knowledge of ESOPs.  I'm ready to reach out to the DOL, but would like to educate myself as much as possible before that.  

Thanks for your help.

There is a lot going on here and there is most likely a lot being left out.

The stock in an ESOP by law has to be appraised once a year by an outside appraiser.  While legally speaking the appraiser only brings a value to the trustee who has the final authority to approve that value or not the fact is ignoring the appraiser is something a trustee can't do as a practical matter.     The trustee has a legal duty to make sure the appraiser is right but can't just ignore.  You will find the legal liability on an appraiser is too high for them to not come up with a value that can't withstand a lot of scrutiny.   So I would tend to trust the appraised value unless you can come up with some very solid reasons to think otherwise. 

Appraising ESOP stock is not simple or easy.  (I am not an appraiser by the way.)  Just knowing revenue and profits isn't enough.  Factors such as does the company have one or just a few main clients that generate a substantial portion of the gross revenue.  There is a famous court case where an appraiser was accused to over valuing a company where Wal-Mart was over 60% (I think that is the number) of the company's gross revenue.  The stock was sold to an ESOP and Wal-Mart dropped the company a few year later.  The stock value crashed.  The claim was they should have discounted the value one normally would give a company like the one in question for the fact they had an additional risk of having too much of their revenue dependent on one source.  My point is there could be factors going into the appraisal you might not even thinking of.  All ESOP stock that is 100% owned by an ESOP gets some kind of discount to the price for the lack of marketability for example.  I have seen that discount be as high as 15% and as low as about 5%.  Your not going to be able to debate these kinds of elements of the appraisal.  

You say the President/CFO runs the ESOP.  What do you mean by that?  Is this person also the trustee of the plan?  The Summary Plan Description (SPD) should tell you who is the trustee of the plan.  An internal trustee isn't illegal it is becoming less common for reasons of conflict.  But a professional trustee isn't cheap so some companies do save the money.  But if the plan has an internal trustee isn't in itself illegal.  

I will let the lawyers that come to these forum speak to the legal questions.  I will say as a practical matter very few of the legal challenges I have seen by a lone participant was worth the cost. 

Once again the appraisers are more fearful of the legal liability of their appraisals being challenged than they are of losing a client if they are unhappy the stock price they are giving isn't what the company wants to make stock prices to be off by large amount very often.  The times you see court cases on it the claim isn't they were told  to come in with a price of X and they did it.  Someone is challenging what seemed like a reasonable assumption that after the fact now seems less reasonable- see my Wal-Mart example above. 

ESOP Guy, thank you for the response. Yes, there is a lot more going on,  26 years is a lot of blood, sweat, and tears shed to help build a very successful and profitable operation.  This was a small very close knit group.  I was a very valued member of the inner circle until I started asking the wrong questions about the ESOP and succession as it related to protecting my substantial ESOP investment.  In particular, young execs being brought in to manage the company and ESOP who had no ESOP shares.  
 

The company has many customers and is not beholden to a select few.  There are also abundant new opportunities out there.  There is no oversight by a board, the President and CFO also run the ESOP, not sure if just one or both are trustees.  

While I am disappointed as to how things transpired with the abuse of power, trust, and loyalty, I am more concerned about ensuring that I am getting fair market value for my shares and moving on.  How can I find out how the shares were valued to further evaluate?  Reaching out to the Department of Labor will undoubtedly open up another can of worms.

While I have read several cases of companies and appraisers overvaluing shares, I do not see any questioning undervalued share disputes from departing employees.  Is there somewhere to find these?  I’m sure from the appraiser perspective, it is much easier to justify a very conservative valuation if pressured by the one writing the check.  

Are there attorneys out there with extensive knowledge that would work on behalf of the employees?  
 

This might be helpful: https://www.nceo.org/articles/rights-esop-participants

Thank you Griswold..

ESOP Guy, I had hoped you would have more to add to this, you seem to have a lot of experience with the plans.  I assumed you were an independent that would share your experience, if you are solely pro management, I understand.....

1 hour ago, HELPPLS said:

Thank you Griswold..

 

ESOP Guy, I had hoped you would have more to add to this, you seem to have a lot of experience with the plans.  I assumed you were an independent that would share your experience, if you are solely pro management, I understand.....

I thought he gave you a lot of good information and advice.

On 4/10/2020 at 7:03 AM, HELPPLS said:

Thank you Griswold..

 

ESOP Guy, I had hoped you would have more to add to this, you seem to have a lot of experience with the plans.  I assumed you were an independent that would share your experience, if you are solely pro management, I understand.....

This is a professional message board and most of us are hired by Plan Sponsors to assist in maintaining the qualified status of their plan. Whether that makes us "pro management" is debatable but they are the ones who typically pay our fees. I personally have very little experience with ESOPs it is not my area of expertise, that said I would recommend you call around to ERISA law firms and ask if they have someone on staff with experience with ESOP valuations and litigation between agreived participants and management. Present them the facts as you know them and ask if there is a case to be made.

And like Bill Presson, I think ESOP Guy has already given you a fair amount of very good information and advice to start.

Sorry, for the slow response.  I didn't get any kind of notice that allowed me to pick up on the fact there was a reply.  

To be clear I work for a Third Party Administrator (TPA) and I am not an appraiser. 

I think you are going to simply have a hard time making a case.  An appraiser's risks are too high for them to simply do what the client wants for fear of losing a paying client.   They are not going to issue a report they don't think they can't defend in front the DOL. 

I would suggest trying to find out if there is an outside trustee or not. The Summary Plan Description should help you on this point.  If there is an outside trustee It would be very rare for the the annual valuation to be off a lot.  In that case it would take both the appraiser and the trustee to risk liability for fear of losing a client. 

If it is an inside trustee there is a conflict to a degree but once again the trustee has to be willing to be open to legal liability to try and play games. 

I have to stress again an appraisal of a private company is based on a fair amount of assumptions.  You can't just show you don't like those assumptions.  You have to show the assumption used weren't reasonable and prudent decisions.   That is a tough thing to overcome. 

I am sorry you don't think the stock price is what you think it should be but everything I have seen unless a subsequent event happens that can cast doubt on the price you have a hard burden to over come to force the issue.  

Thank you for the responses.  Lou, thanks for clarifying the board status, that was my assumption.  
 

ESOP Guy, thank you for the follow up.  
 

I understand the position most of you are in and the responsibility you have working with the plan sponsors.  I guess I came here looking for someone or a firm, that has extensive ESOP knowledge, that can go through the process on my behalf and evaluate all of the facts.  Just setting a dollar amount per share with no back up saying take it or leave it seems a bit unreasonable. I will reach out to the DOL to see how they might be able to assist.  
 

Thanks again..