For ESOP companies, whether internally or externally Trusteed, it is increasingly important to make sure that your appraisal report thoroughly documents the ESOP appraisal.
A recent DOL settlement includes specific “Process Requirements” impacting appraisal report content. On June 2, 2014 GreatBanc Trust Company and the Department of Labor (DOL) entered into a settlement agreement in the case of Perez v. GreatBanc Trust Company, United States District Court for the Central District of Columbia, 2014. As part of this settlement agreement, the DOL agreed to a set of process requirements that GreatBanc must follow in the future when engaged to purchase or sell employer securities that are not publicly traded.
To be clear, the process requirements are not an amendment to the law or a DOL regulation, advisory opinion, or Field Assistance Bulletin. They are specific only to GreatBanc. However, in the short time since this settlement agreement was issued, we have already seen a number of independent ESOP Trustees and ESOP legal counsel take action so that the ESOP appraisal providers’ processes and work product adhere to these process requirements. This is because it is believed that the DOL will likely hold all ESOP Trustees to these process requirements in its enforcement activities, similar to what the DOL has done with its Proposed Regulations on Adequate Consideration which were never finalized.
“We have already seen ESOP Trustees step up
Appraisal report content requirements.”
Here is a sampling of some of the minimum appraisal report content likely to be required by Trustees for annual appraisals as a result of the GreatBanc Process Requirements:
- Reasonableness of any forecasts considered including a comparison to historical performance and industry peer groups, as well as all material forecast assumptions
- Calculation of a list of specific financial ratios
- Explanation of financial statement adjustments
- Weighting applied to valuation methods
- Discounts and/or premiums applied (marketability, minority interest, control)
- Analysis of the Company’s strengths and weaknesses
- Discount rates chosen in the income approach
- Consistency of economic and industry-specific narrative with the quantitative aspects of the appraisal report
- Comparability of guideline companies used in the market approach
- Support for selected multiples used in the guideline company method
 Additional requirements specific to ESOP transactions are also included in the Process Requirements but not discussed herein.