September 20, 2021

Court Rules Decisively Against DOL in ESOP Valuation Case

NCEO founder and senior staff member

In Walsh v. Bowers, No. 1:18-cv-00155-SOM-WRP (D.C. Hawaii, September 17, 2021), a district court decisively ruled in favor of the trustee and the board of directors of the ESOP company Bowers+Kubota in an ESOP valuation case. The judge ruled that the DOL’s valuation "rests on errors" because its expert failed to follow standard valuation practices, used inaccurate and incomplete information about the company’s finances, and improperly compared the price the ESOP paid to a very preliminary lower offer from another company. The court noted that the preliminary offer was likely just a negotiating tool, analogizing that  “an individual who makes an offer of $15,000 for a used luxury car with a Blue Book value of $40,000 does not, by virtue of making a ‘lowball’ offer that is never accepted, tend to establish that the car is worth only $15,000.”

The court also noted that the ESOP trustee, while accepting a price very close to what the sellers were seeking, saved the company millions of dollars by negotiating a relatively low rate on seller notes used to finance the deal.

The court also rejected the DOL argument that the sharp drop in post-transaction value showed the ESOP paid too much, noting that the drop in value was simply a function of the debt needed to do the deal.

The decision is one of the most comprehensive rebukes of DOL arguments in valuation cases.