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FEATUREBUSINESS BANKING & CORPORATE COUNSEL
HOW THE U.S. DEPARTMENT

OF LABOR CHANGED

ESOP TRANSACTIONS WITHOUT REGULATIONS

BY TIM JOCHIM & MIKE SORICE

uring October 2010, the it previously performed the analysis within VAs must also consider how ESOP
Employee Benefits Security a 15-month period immediately before the document provisions affect repurchase
Administration (EBSA) of current transaction and that the information it obligations, transaction prudence, and
the U.S. Department of Labor relied on is still accurate. stock value. First Bankers and Alpha added
D (DOL) issued a proposed The First Bankers Trust Co. Settlement requirements to describe risks facing the
regulation to update the definition of a fiduciary Agreement (First Bankers”) added a ESOP sponsor that could cause financial
under the Employee Retirement Income Security requirement that trustees list at least three performance to fall below projections.
Act (ERISA). Within a year, the EBSA and DOL consulted references and consider regulatory
withdrew the proposed regulation in the face investigations into the valuation advisor. A Financial Statements & Fairness Analysis
of Congressional and pension and securities trustee need not re-investigate the VA if The agreements set out requirements for
industry opposition. In particular, organizations it performed an analysis in the preceding financial statements. Subject to certain
that served trustees of employee stock ownership calendar year. The selection requirements exceptions, ESOP trustees and valuators
plans (ESOPs) opposed the proposed regulation. of the Joyner Settlement (Joyner) were the must work from CPA-prepared audited
In an artful strategic move, the DOL shifted same as the Process Agreement. The Alpha and unqualified financial statements for the
its focus from regulation to litigation to remedy Settlement Agreement (Alpha) included the preceding five years. If the sponsor provided
the increased level of less-than-prudent same selection requirements as the Process unaudited or qualified statements, the trustee
leveraged ESOP transactions packaged by Agreement. Its re-investigation provisions must determine whether reliance on those
investment banking firms. The key component were the same as First Bankers. statements is prudent and document its bases
of the litigation strategy involved settlement for its belief. The trustee may not proceed with
agreements with major ESOP trustee FIDUCIARY OVERSIGHT AND REVIEW the transaction if reliance would be imprudent.
organizations which became the “de facto” The settlement agreements required certain First Bankers and Alpha allow trustees to
standard for all leveraged ESOP transactions. fiduciary oversight and review processes, proceed with qualified and unaudited financial
The settlements required defendant trustees including requirements for financial and statements if sellers who are disqualified
to apply more rigorous procedures to assure economic analysis, financial statement and persons indemnify the ESOP for harms arising
the reliability of appraisals and the terms of fairness analysis, and VA report assessment. from those statements.
ESOP transaction financing by requiring The agreements also required a fairness analysis.
merit assessment of appraiser qualifications, Financial Analysis Trustees must determine whether transactions are
documentation of appraisal methods and The Process Agreement required fair from a financial perspective, fair to the ESOP
assumptions, confirmation of appraisal investigation of economic and financial relative to other parties, and whether the terms are
decisions, and the use of more reliable and information. VAs must identify people market-based, commercially reasonable, and in
current financial statements. The settlements who provided projections and inquire into the ESOP’s best interest.
establish a process for the qualification and use conflicts of interest. First Bankers required
of valuation advisors (VAs), the information a written record of that investigation. Alpha Report Assessment
relied upon by the VAs and fiduciary oversight required reasonable inquiry into projections. The agreements included requirements for
and review by transaction trustees. Under all the agreements, VAs must assessing reports. Trustees must ensure VAs
compare projections to historical data and complied with the requirements, above, and
VA SELECTION investigate returns on assets and equity, EBIT independently review financial statements
The GreatBanc Trust Co. Process Agreement and EBITDA, capital expenditure ratios, and projections to determine whether reliance
(the “Process Agreement”) required a written revenue growth, and cash flow ratios. VAs thereon is reasonable and prudent. Under
analysis addressing reasons for selection, listing must explain why they disregard any metrics. First Bankers and Alpha, if projections are
all VAs considered, discussing qualifications They must set out in writing the bases for unreasonable trustees must ask the VA to
and consulted references, noting court concluding that comparable companies are account for the unreasonable projections.
proceedings against the VA, and explaining actually comparable, including size, customer They must prepare a written analysis of reports
the prudence of a VA selection. A trustee need concentration, and earnings volatility. They that addresses marketability discounts, control
not re-investigate the qualifications of VAs it must explain discounts applied to multiples premiums, economic projections, sponsor
has used in the past if the trustee certifies that and, if no discount is applied, explain why. strengths and weaknesses, discount rates,

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