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The Employee Ownership Report

NewsletterConcisely written for leaders in employee ownership companies and for service providers in the field, the NCEO's bimonthly newsletter, the Employee Ownership Report, is the most efficient way to stay informed about legal issues, current events, best practices, breaking research, management approaches, and communications ideas for employee ownership companies.

Available exclusively to NCEO members, the Employee Ownership Report is delivered in hard copy and all issues back to 1997 are available in the members-only area of the Web site.

Nonmembers are invited to read the sample article below from the current issue of the newsletter. Every time a new issue appears, the sample article on this page will be replaced by one from the new issue. Join online for only $90 to receive the Employee Ownership Report and all our other membership benefits.

You also can read a sample issue of the entire newsletter (July-August 2011).

Sample Article from the September-October 2014 Issue:

DOL and GreatBanc Reach Agreement on Fiduciary Practices

On June 2, 2014, GreatBanc Trust Company and the Department of Labor entered into an "Agreement Concerning Fiduciary Engagements and Process Requirements for Employer Stock Transactions." In the DOL's press release, Assistant Secretary of Labor for the Employee Benefits Security Administration Phyllis C. Borzi said that "others in the industry would do well to take notice of the protections put in place by this agreement. ESOPs are an important tool to promote employee ownership, not a way to create big cash-outs for owners and top executives."

In its press release, GreatBanc described the agreement as "a product of constructive and collaborative discussions with top DOL officials in Washington D.C." and said it "is happy to have established a positive channel of communication with top decision makers in the DOL." GreatBanc looks forward "to a good relationship with the DOL going forward." The agreement sets forth a process to be followed when GreatBanc, as trustee, purchases or sells stock on behalf of an ESOP. In its press release, GreatBanc wrote that "In a series of meetings with the DOL officials, GreatBanc informed them about the excellent policies and procedures that GreatBanc has had in place for many years, the DOL contributed its ideas, and we mutually agreed that it would be good to spell these out in a written document that both the DOL and GreatBanc would follow."

The agreement has several key elements, described below.

Valuation Assessment

The trustee must "prudently investigate the valuation advisor's qualifications" and take "reasonable steps to determine that the valuation advisor receives complete, accurate, and current information necessary to value the employer securities." It also must determine "that its reliance on the valuation advisor's advice is reasonable before entering into any transaction in reliance on the advice." The appraiser should not have valued the stock that is to be the subject of the transaction with the ESOP for a party to the transaction other than the trustee.

Trustees need to document why they chose the appraiser and how they vetted the appraiser's qualifications. This need not be done every time for appraisers used regularly. The trustee should know the qualifications of the person actually doing the work, not just the firm.

One of the more important parts of the agreement concerns the specific documentation a trustee should ask for from the appraiser. These include looking at a number of specific metrics on projected financial performance and how they compare over the prior five-year prior period as well as to comparable public company data, if any. The measurements described are fairly standard in good ESOP appraisals; the agreement specifies what to look for and document.

The agreement also provides that the appraiser's report or trustee's documentation should demonstrate consideration of how "plan document provisions regarding stock distributions, the duration of the ESOP loan, and the age and tenure of the ESOP participants may affect the ESOP sponsor's prospective repurchase obligation, the prudence of the stock purchase, or the fair market value of the stock." This underscores an emerging but not yet universal practice to consider repurchase obligations and other distribution issues in connection with the appraisal.

The agreement requires that the trustee evaluate the debt for the transaction and the company's ability to repay it. It also requires that the trustee consider the fairness of the transaction with respect to such issues as whether the cost of the debt is reasonable.

The agreement states a clear preference for audited company financial statements in connection with the appraisal. If the company's financial statements are not audited, the trustee needs to document why it is reasonable to rely on unaudited financial information.

Providing the Right Information to the Appraiser

The agreement provides that the trustee should document that any information, including financial projections, that are provided to the appraiser are reasonable. The trustee should also document that it has considered a list of 16 different items in the valuation report, including assumptions as to various discounts, adjustments to financial projections made by the appraiser, the weighting of various methods of appraisal, discount rates, treatment of debt, assessment of the company relative to markets and the industry, and other standard elements of ESOP appraisals.

The trustee also should document the specific steps taken to assess the valuation report as well as who did the work. That should include a discussion of the questions asked and areas of disagreement and how they were resolved.

The agreement also provides that "the trustee will consider whether it is appropriate to request a claw-back arrangement or other purchase price adjustment(s) to protect the ESOP against the possibility of adverse consequences in the event of significant corporate events or changed circumstances." A "claw-back" generally requires that the seller returns some of the price it received for stock it sold in the event that the value of the stock goes down significantly during a specific period of time after the transaction. It is difficult to get a seller to agree to such a provision, but the agreement states that the trustee should document in writing its consideration of the appropriateness of a "claw-back or other purchase price adjustment(s)."


The agreement generally does not break new ground in what is generally seen as prudent process in evaluating and acting on an ESOP appraisal in connection with a transaction. That should provide some comfort to ESOP practitioners and companies that the Department of Labor is not setting out new and potentially difficult criteria for ESOP appraisals. This agreement is important because it lays out a specific process that trustees should follow in showing that they have proceeded appropriately in concluding that the ESOP is not paying more than fair market value for its shares. Trustees who follow these steps may have a greater degree of comfort in responding to DOL challenges.