DOL v PBI Banks, Inc. and The Miller’s Health Systems, Inc. Employee Stock Ownership Plan

No case is clear cut, but lessons often can be learned.  In the recently filed action, the Department of Labor v PBI Bank, Inc. and The Miller’s Health Systems, Inc. Employee Stock Ownership Plan (United States District Court for the Northern District of Indiana, Civil Action: 3:13CV1400), some, but not all, of the issues surrounded the valuation report.

In this initial ESOP transaction, multiple drafts of a valuation report were produced.  The ultimate valuation, according to the Department of Labor’s filing, failed to consider several items.

  • No marketability discount was applied.  Though drafts of the report included a discount of 5%, the final version had none.
  • The stock purchase agreement included an earn-out agreement which provided the selling shareholders an amount equal to 40% of future earnings over a specified threshold for about eight years.  The valuation, according to the Department of Labor, failed to address this issue.
  • A stock option plan set aside 20% of Company shares for the selling shareholders, at a strike price of $4.08 per share.  The valuation for the initial transaction provided a total value of $42,379,000 for the 1,000,000 outstanding shares, according to the Department of Labor.  At the valuation date, these options apparently were “in the money” but according to the Department of Labor, the dilutive effect was not considered in the final report

Note that all of the above statements are based on our interpretation of the Department of Labor’s filing, not on a final Court decision.

Other issues outside the valuation report trumped those mentioned above.

The ‘lesson learned’ here is to ensure the valuation analyst knows the intricacies of an ESOP, particularly with the initial valuation.  At our firm, we review all important company resolutions and agreements, those directly associated with the ESOP and those created contemporaneously with the ESOP transaction.  We look at the financing arrangements.  We discuss all of items these with the Plan Administrator, the Trustee and company management.

We don’t opine unless we’re satisfied the final opinion is reasonable, fair to all parties, and, most importantly, can be supported. A DOL auditor recently remarked to a client our work product was among the most thoroughly documented he had reviewed.