August 12, 2019

ESOP Valuation Upheld as District Court Dismisses Suit

On August 7, in Lee v. Argent Trust, Judge Terrence Boyle of the District Court of Eastern North Carolina dismissed a lawsuit brought by an ESOP participant at Choate Construction Company, finding that the plaintiff had misunderstood the valuation of the shares. In 2016, the ESOP bought 80% of the shares of Choate for $198 million using a combination of outside financing and seller notes.

The judge’s ruling is unusual in the clear, simple language he used to explain the principle involved in the valuation, using the analogy of purchasing a house. Noting that if the entire value of the house was borrowed, the new owner's net assets would be zero, the judge wrote:

"The purchase price was $198 million and the Choate ESOP took on $198 million in debt to obtain the stock. The expected value of the Choate ESOP's shares—at least in the short term— would be $0. Instead, the $64.8 million valuation at the end of December 2016 reflects the fact that the Choate ESOP, like the hypothetical buyer, realized an immediate equitable benefit. That benefit has only grown since, as the Choate ESOP's value was pegged at $107.2 million by the end of 2017. [DE 31-3, p. 25]. In other words, the Choate ESOP actually bought the 8 million Choate shares in December 2016 at a discount (or the shares actually appreciated in value, approximately 33%, in less than a month)."