ESOPs and Stock Valuation
Stock of an ESOP
If the ESOP is purchasing stock for which there is a recognized market, adequate consideration is equal to the current price of the stock on the stock market. However, if the ESOP is purchasing stock (“Company stock”) that does not trade on the stock market (as in most closely held businesses), adequate consideration is defined as the fair market value of the asset being purchased. In accordance with Revenue Ruling 59-60, “fair market value is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
The fair market value of employer securities acquired by an ESOP that are not readily tradable, or do not have an established market value, are required to be determined by an independent appraiser. An independent appraiser should not be a party to the transaction. His or hers primary business should be valuing closely held businesses. The appraiser usually cannot be one’s outside accounting firm and cannot be currently, or in the future, valuing the business for other purposes such as estate planning.
A fiduciary or trustee for the ESOP has the burden of proving that the ESOP has received adequate consideration for its purchase of the employer’s stock. It is important that a fiduciary or trustee understand their responsibilities and that the appropriate measures be put into place so that the transaction can avoid being labeled as a prohibited transaction. The risks and violations are reduced if the fiduciary engages a specialist that has the professional qualifications, experience and good reputation within the industry. It is important that the fiduciary or trustee understand the objectives and scope of the specialist’s work and the methods or assumptions being utilized. It is also important that they understand the relationship of the appraiser to the sponsoring Company because evaluations are required to be done by an independent appraiser.
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Author: Virginia Piccolo | [email protected]
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