BVR Logo April 3, 2019 | Issue #199-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include: 


Experts comment on recent Brundle ESOP decision

In its recent Brundle opinion (see last week’s coverage), the 4th Circuit Court of Appeals, in describing the major actors in the case, included a quote (not attributed) that the ESOP world was “a very incestuous community.”

James F. Joyner (Integra Valuation Consulting LLC), an ESOP expert, called this description “unfortunate.” Joyner explains that, “because there are fewer than 10,000 ESOPs in the whole country, the ESOP professional community is understandably small. To navigate professionally within the ESOP world, one must have a solid knowledge of taxation, financial accounting, fiduciary standards, ERISA, finance, and valuation. There truly are few professionals who are good at this work, and those professionals are actively engaged in studying and in serving the ESOP community. All of us who are committed to serving ESOPs are vulnerable to attack or criticism that only comes through hindsight and ex post analysis. It is, therefore, disheartening when courts overlook the intense efforts the ESOP community puts into this work.”

We also heard from Dana Messina, who served as expert for the prevailing party, the plaintiff, in the Brundle case and also has served as an expert for the Department of Labor in numerous other ESOP cases. When asked about criticism from the ESOP community and others, including recently members of Congress, that the DOL has been too aggressive in its oversight of ESOPs, Messina responded:

The industry should embrace the actions by the DOL in Bruister, Bankers Trust and Brundle, the most recent ESOP valuation cases to go to verdict. In each of these cases, the actions of the trustees and valuation firms are largely indefensible. The trustees paid a just and heavy price for their willingness to approve transactions that were not exclusively for the benefit of the hard-working employees at each these companies. There is a fairly simple test. Would you want someone investing a bulk of your family’s retirement in the proposed deal in front of you, at the proposed price? If you did enough diligence and analysis to confidently say, “Yes, this is a good deal for the ESOP,“ I sincerely doubt you will find yourself in the crosshairs of the DOL.

I have had many candid conversations with some terrific ESOP valuation professionals regarding the facts involved in each of these cases. Universally, they tell me the courts got these cases right. Lastly, I’ve worked with the DOL on quite a few cases over many years and honestly have not seen them pursue a single case that I would categorize as a close call.

A digest of Brundle v. Wilmington Trust N.A., 2019 U.S. App. LEXIS 8504, 2019 WL 1287632, and the court’s opinion will be available soon at BVLaw. More commentary appears in last week’s issue of BVWire and also in this issue.


It's not just about FMV, Brundle ESOP appeals court ruling shows

“Fair market value” is not the only consideration when it comes to evaluating the performance of the ESOP trustee, the 4th Circuit made clear in its recent ruling, on which we reported here last week and which represents another milestone in ESOP case law.

At the beginning of its analysis, the 4th Circuit explained the duties imposed on an ESOP trustee and laid out the framework courts use to determine liability. ESOP trustees and valuation experts who want to survive litigation must keep these legal principles in mind.

‘Prudent man’ standard: In a nutshell, an employer may sell stock to the ESOP, but only if the price is for no more than “adequate consideration.” ERISA does not define the term “adequate consideration,” but, under the DOL’s proposed regulations (the ESOP community is still waiting for final regulations), “adequate consideration” must: (1) reflect a stock’s fair market value; and (2) be “the product of a determination made by the fiduciary in good faith.” The 4th Circuit emphasized that “the focus of the adequate-consideration inquiry rests on the conduct of a fiduciary, as judged by ERISA’s ‘prudent man’ standard of care.”

As the 4th Circuit explained, the fiduciary must act “solely in the interest of the [plan] participants,” using “the care, skill, prudence, and diligence a ‘prudent man acting in a like capacity’ would use.” In the instant case, the district court found the trustee did not do so, and the appeals court found the record, particularly as concerns the trustee’s engagement with the valuation underlying the contested transaction, supported the district court’s finding.

By way of example, the ESOP appraiser’s practice of consistently rounding up numbers may seem like a minor valuation-related issue but proved to be an issue that resonated with both courts and illustrated to them the trustee’s failure to represent the interests of the plan. Both courts noted that this rounding practice repeatedly increased the price the ESOP had to pay for the company stock. The district court noted an ESOP fiduciary should have aimed to achieve the lowest possible price for the plan. The trustee should have asked why the ESOP valuator used this rounding practice. The 4th Circuit agreed. Although not dispositive, this type of conduct illustrated the trustee’s “lackluster due diligence displayed throughout the transaction process,” the 4th Circuit found.

On a larger scale, the 4th Circuit agreed with the district court that, even if the trustee did not act in bad faith in representing the ESOP, its conduct throughout the transaction was not that of a prudent fiduciary. The trustee allowed the plan to overpay and therefore was liable for breach of fiduciary duty and damages, the 4th Circuit affirmed.

A digest of Brundle v. Wilmington Trust N.A., 2019 U.S. App. LEXIS 8504, 2019 WL 1287632, and the court’s opinion will be available soon at BVLaw.

Damodaran values Lyft ahead of IPO

Check out the spreadsheet Professor Aswath Damodaran (New York University Stern School of Business) used to value Lyft prior to its IPO this past Friday (March 29). He valued the equity at approximately $16 billion, which includes the IPO cash infusion (he used the rumored amount of $2 billion for that). He pointed out that, once the stock opens for trading, “it is not value that will determine the opening bid, but pricing.” That is, “investors look at what others are paying for similar companies, scaling to some common operating variable.” What actually happened? Lyft started trading at $87.24 per share, more than 20% above its IPO price of $72, and the company raised about $2.3 billion from the listing. The initial pop nudged Lyft’s valuation to $25 billion. Damodaran had said that, if investors priced Lyft at $25 billion, “Uber will be quicker to go public and will expect markets to attach a pricing in excess of $130 billion to it, given that its revenues were more than $11 billion in 2018.”

Extra: Confusion over the price-versus-value phenomenon is at the root of many of the problems that arise in valuation, according to Damodaran. He discusses this in an article, “Damodaran Discusses Value Versus Price and His View of the BV World,” that appears in Business Valuation Update. If you’re a subscriber to BVU or to BVResearch Pro, you have access to the full archive of articles going back 25 years.

ASB to discuss 2020-21 USPAP April 5

On April 5, the Appraisal Standards Board (ASB) will lead a discussion about the fourth exposure draft proposals for the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). In addition, there will also be updates from The Appraisal Foundation, Appraiser Qualifications Board, and the Appraisal Subcommittee. You can be part of the discussion if you register to attend the live event or participate via live streaming. It will be held at the InterContinental Kansas City (Kansas City, Mo.) on April 5 at 9:00 a.m. (Central Time).


Key topics covered at ASA Energy Valuation Conference May 2

The Houston Chapter of the American Society of Appraisers (ASA) will present the Energy Valuation Conference on May 2 in Houston. The conference agenda will feature presentations from nationally recognized speakers who are profession leaders. Here are a few of the sessions:

  • Reserve Definitions (Delores Hinkle, Prior Oil & Gas Reserves Committee);
  • Oil & Mining Appraisals in Exploration, Development & Production (John Gustavson, Mineral Appraisal LLC);
  • Valuation of Ground Water in Permian Basin (Gabriel Collins, Rice University Baker Institute);
  • Tax Issues in the Energy Field (Bryant P. Lee, Latham & Watkins); and
  • Valuation of Power Plants (John Ray, BVA Group).

You can attend the conference either live on-site or via live webcast, brought to you by BVR.

Equal split of attorneys and financial experts at divorce confab May 8-10

So far, an almost equal split of attorneys and valuation/accounting experts will be attending the National Divorce Conference in Las Vegas May 8-10, presented by BVR and the American Academy of Matrimonial Lawyers (AAML). Registrations are currently running at 46% lawyers and 54% BV/accountants. That means the conference is an excellent opportunity for valuation experts to interact with attorneys on crucial divorce matters. What’s more, both an attorney and financial expert will conduct many of the sessions, so you get both perspectives. Will we see you there?

Updated research on global risk premiums and risk-free rate

In some European countries, it appears there is much more disagreement about the risk-free rate (RF) than the market risk premium (MRP), according to a new survey. “Market Risk Premium and Risk-Free Rate Used for 69 Countries in 2019: A Survey,” by Pablo Fernandez, Mar Martinez, and Isabel Fernández Acín, is based on almost 2,000 responses from finance and economics professors as well as company analysts and managers. The authors state: “Due to ‘Quantitative Easing,’ many respondents use for European countries a RF higher than the yield of the 10-year government bonds. The coefficient of variation (standard deviation/average) of RF is, on average, 2.75 times higher than the CV of MRP for 24 European countries.”

European goodwill impairment down 35% in 2017

Total goodwill impairment recorded by European-listed companies in the STOXX® Europe 600 dropped 35%, to €18.5 billion, in 2017, according to the “2018 European Goodwill Impairment Study,” from Duff & Phelps. Four out of the eight highlighted countries within the STOXX® Europe 600 saw a decline in the proportion of companies recording a goodwill impairment in 2017. Germany saw the largest increase, while Italy showed the largest decrease. The top three industries with the most significant drop in goodwill impairment amounts in 2017 in order of magnitude are (€ billions): financials and real estate (€8.1 to €3.4), telecommunication services (€7.0 to €2.4), and consumer discretionary (€5.0 to €0.9).


BV movers...

People: Christopher Rosenthal, CPA/ABV/CFF, ASA, AEP, has joined Vallit Advisors as a partner in the firm, which focuses solely on dispute, valuation, and forensic accounting services; he was previously a director at Ellin & Tucker, where he led the accounting firm’s disputes, forensics, and valuation services practice … Peter Gampel, ABV/CFF, ASA, CBV, CA, has rejoined Fiske & Co. of South Florida as director of the firm’s forensic, litigation, and valuation services; he has more than 35 years of experience with litigation consulting and business valuation services, and he has prepared over 1,000 business valuation and damages reports … Carla Nunes, CFA, has been appointed to the Education Committee of the International Institute of Business Valuers (iiBV); she is a managing director in the Office of Professional Practice with Duff & Phelps based out of Philadelphia and she provides firmwide technical guidance on a variety of valuation, financial reporting, and tax issues … Joanne Chiu has joined Los Angeles-based Macias Gini & O’Connell (MGO) as managing director of MGO’s Asia practice.

Firms: New York-based Marcum has merged Guyder Hurley of Braintree, Mass., into its Boston office as of March 1, adding 17 associates, including one partner and one managing director, to Marcum’s New England region; Guyder Hurley specializes in the affordable housing industry … Bloomington, Minn.-based Boeckermann Grafstrom & Mayer (BGM) has formed a Family Office Services Group to serve the business and personal needs of high-net-worth families, executives, professional athletes, entertainers, and others … New York-based Friedman LLP has unveiled a new website and brand of its cybersecurity company, CyZen: Stoy Malone & Co. of Baltimore and Sobul Primes & Schenkel of Los Angeles will join CPAmerica, an association of independent CPA firms.

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Upcoming BVR training events

  • FREE WEBINAR: Vertical IQ: Very Smart Industry Research for Business Appraisers (April 4), with Susan Bell (Vertical IQ).

    Take a tour of a platform for industry research that reveals your subject company’s market presence, financial metrics, benchmarks, and local economic data. Vertical IQ currently has 390 industry profiles: 280 “full-length profiles” plus 110 specialty spotlights on niche industries.

  • BVLaw Case Update (April 9), with Sylvia Golden (Business Valuation Resources) and R. James Alerding (Alerding Consulting LLC).

    The speakers review a number of significant recent court decisions related to valuation and damages, explaining the methodologies that worked—and those that did not.

New and trending LinkedIn discussions

Using a Calibration Model for an Early-Stage Enterprise Investment

The Absence of a Size Effect Relevant to the Cost of Equity

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join today.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

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