Addressing a Lack of Formal Guidance on Fair Market Value and ESOPs
Addressing a Lack of Formal Guidance on Fair Market Value and ESOPs
50 years without Formal Guidance on ESOP Share Valuations
On April 14th, 2023, a significant development emerged in the realm of employee ownership as the U.S. The Department of Labor (DOL) made a firm commitment to issue proposed regulations. These regulations aim to provide much-needed clarity regarding what constitutes adequate consideration for private company shares sold to Employee Stock Ownership Plans (ESOPs). Defined under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA), the forthcoming regulations hold the potential to revolutionize ESOP valuations. The DOL’s regulatory agenda suggests that the regulations could be issued in the coming months.
The regulations are proposed to have a significant impact on the creation and ongoing viability of ESOPs.
How will this be impactful in the employee ownership world?
Clarity and Certainty: There is a current lack of formal guidance on ESOP valuations, this has created uncertainty in the valuation process. The proposed regulations will address this long-standing concern within the ESOP community and will also provide clarity on what constitutes adequate consideration for shares sold.
Facilitating Formation: With a clear guidance in place, companies will feel both more comfortable and confident in adopting ESOPs as a viable ownership option, thereby promoting employee ownership and wealth creation for employees.
In an article by The ESOP Association, James Bonham, President and CEO of the association expressed a concern in the DOL’s promises because the Department has previously committed to issuing regulatory guidance but fails to do so. “The reason we had to file the petition was because the Department has refused to issue the regulatory guidance as required by ERISA for almost 50 years now.”
The forthcoming DOL regulations reflect a significant step forward in addressing the longstanding need for formal guidance on ESOP valuations. The employee ownership world eagerly anticipates the issuance of the proposed DOL regulations in hopes that they will bring much-needed clarity and guidance to ESOP valuations, paving the way for continued growth and success of employee-owned businesses.