BVR hopes that the entire valuation community will stay safe and healthy—and we are here to support you and your colleagues however you might need us. We will be livestreaming selected events for the ASA (keep checking our training schedule for details), and we will be adding flexible attendance options to the National Divorce Conference that we co-host with the AAML to make it easy for you to attend live or online. Also, we will be developing immediate programming with experts to discuss how BV firms are responding to the crisis and what it may mean on both the macro and micro valuation levels. If you are interested in speaking on one of these programs, if you have a topic to suggest, or are interested in moving a local chapter meeting online, please contact BVR’s training director, Jared Waters, at jaredw@bvresources.com. If you have any other suggestions as to how we may help you and your firm, please don’t hesitate to contact us here at editor@bvresources.com.

New DOL process agreement confronts control issue in ESOP valuations

The Department of Labor recently settled ESOP litigation with the trustee Farmers National Bank of Danville (FNB). The settlement incorporates a process agreement that contains noteworthy directives instructing the trustee on handling controlling interest acquisitions and indemnification matters.

This is the sixth such process agreement the DOL has made with defendant trustees. Ostensibly the agreements only bind the parties to it, here FNB. At the same time, the agreements have come to serve as guideposts to the ESOP community as a whole regarding the issues the DOL prioritizes in scrutinizing ESOP transactions and the positions the DOL takes on the issues. The crux long has been that the DOL has failed to issue final regulations that provide legal guidance and certainty to actors in ESOP transactions.

Control provision: The control provision in the FNB agreement applies only “when the ESOP intends to buy a controlling interest in the company whose stock it intends to acquire.” It speaks to the question whether the ESOP, in purchasing 100% of the stock of a company, has acquired actual control over the company such that it is appropriate to include a control premium in the valuation underlying the transaction. This issue was heavily litigated in the two key cases arising in the 4th Circuit, Brundle and Vinoskey. In both cases, the courts sided with the DOL in finding the ESOP did not in fact acquire control of the company and a control premium was not justifiable.

The FNB agreement obliges FNB, when acting as trustee in an ESOP transaction, only to approve a transaction in which the ESOP pays for a control premium if FNB ensures the ESOP acquires a host of specific rights that, in the DOL’s view, reflect true control over the company. “Control,” under the agreement, means having “all of the unencumbered rights” a controlling shareholder normally would have as well as the rights normally vested in the company’s board of directors and top executives. ESOP practitioners have chafed at this expansive definition of control.

Moreover, if the transaction imposes restrictions on the ESOP’s ability to control the company or the ESOP does not acquire “the degree of control of the company commensurate with the ownership interest it is acquiring,” FNB as trustee must ensure the purchase price reflects the ESOP’s lack of control. In these circumstances, FNB has to ensure that the valuation does not only include a control premium but includes “an appropriate lack of control discount [DLOC], to the extent that the ESOP’s rights of control are diminished.”

Open questions are whether the list of rights the DOL provides here is now applicable in all ESOP transactions to show the ESOP has acquired actual control, whether a transfer of rights short of those on the list requires an adjustment in the form of a DLOC, and how one calculates the “appropriate” lack of control discount.

Indemnification provision: Also important is a provision that says FNB cannot request indemnification by an ESOP or “ESOP-owned company (irrespective of whether the ESOP owns some or all of the company’s stock)” for liability and losses from breach of fiduciary duty claims or other ERISA violations. FNB, as defendant, also cannot ask for the advancement of legal fees “unless an entirely independent third-party determines that there has been no breach of fiduciary duty.” Even then, there has to be “a prudent arrangement” that guarantees a refund of advanced fees or costs if a court later determines there was a fiduciary breach.

As legal exposure particularly for ESOP trustees has increased, who bears the cost of defending against DOL action has become a critical issue. This provision suggests an effort by the DOL to tighten restrictions on the defense-related assistance available to ESOP trustees.

The case is Scalia v. The Farmers National Bank of Danville, U.S. District Court (S.D. Ind.), Case No. 1:20-cv-674 (Feb. 28, 2020). To see the consent order and judgment as well as the incorporated process agreement, click here.

Hat tip to James F. Joyner (Integra Valuation Consulting LLC) for alerting us to this case.

Ever think of attending CLE events to build your BV practice? That’s what James Koerber (The Koerber Co. PA) did, and it worked like a charm. He had been struggling with his new solo practice and almost gave up when he started using tactics like this—and now he has one of the more successful valuation and litigation services firms around. As he explained during a recent interview with Rod Burkert (Burkert Valuation Advisors LLC), attending CLE events helps build name recognition and you stand out, since you probably are the only nonlawyer in the room. At one CLE class, Koerber was among 150 attorneys who asked him “Why are you here?” and he responded that as an expert he was there to learn. The speaker called on him to give his perspective on the topic, so there he was talking in front of a slew of potential referral sources. The interview was part of Burkert’s webinar series, Practice Development INSIDER, that features some of the leading valuation practitioners revealing their time-tested ideas behind building a practice. The next webinar will be April 3 and will feature Barbara Price (Mercer Capital). For more information on the series, go to Burkert’s website.

As BV conference season approaches, the obvious question is how the coronavirus is impacting these events. Keep in mind that things are changing rapidly, but, at the time of this writing, here is a rundown of the status of some of these events.

The New York State Society of CPAs Business Valuation/Litigation Services Conference on May 18 in New York City is currently scheduled to be held as planned, the event’s organizers tell BVWire. There is an option to attend via webcast.

NACVA’s 2020 Business Valuation and Financial Litigation Super Conference has an online option. NACVA has made no official announcement as to whether in-person attendance has been canceled.

Like you, BVR is optimistic that the coronavirus will be contained before the AAML/BVR National Divorce Conference is held in Las Vegas September 10-12. An option to attend online will soon be made available. We know that you need to make choices with confidence, so there is a risk-free cancellation policy with 100% full refunds being issued up until August 10 (a month before the event).

The American Society of Appraisers has no immediate plans to cancel or postpone its annual conference scheduled for October 11-13 in Chicago. Select sessions from the BV track will be available via live streaming. The ASA Fair Value Conference on May 6 in New York City and the ASA/USC Fair Value Conference on June 18 in Los Angeles have been canceled for in-person attendance, and online options are being explored.

BVR will definitely offer the Houston ASA's chapter’s Energy Valuation Conference on May 13 online only. BVR will convert all “in person” tickets to “online” tickets at no extra cost to attendees. What’s more, all early-bird tickets will be honored, so there is no need to hesitate to register for the conference today. Also, the Houston chapter’s Expert Witness Workshop & Mock Trial has been rescheduled to Thursday, August 27, at the South Texas College of Law in downtown Houston. Immediately following will be the Forensic Expert Witness Association’s National Conference on August 28-29 in the same location, for three total days of CE/CPE/MCLE educational hours and networking.

Most of the AICPA’s events are currently going on as planned, but it is adding an online attendance option free of charge, according to the organization’s Coronavirus Resource Center. Its Forensic & Valuation Services Conference is scheduled for November 9-11 in Denver.

The Appraisal Foundation has a dedicated page on its website for all coronavirus information relevant to appraisers. The organization is currently determining whether classroom courses can be held virtually. The meeting of the Appraisal Standards Board on April 3 will now be a virtual meeting only and will be livestreamed.

Of course, the first concern is the health and safety of all individuals involved and all organizations are monitoring the situation very closely, so things may change at any time.

Appraisals of legal marijuana firms continue to be challenging and risk is a major factor, say Ron Seigneur and Ryan Cram, who are both with Seigneur Gustafson LLP, a firm based in Colorado, one of the first states to legalize adult recreational marijuana. During a recent webinar, they cited an engagement in which an additional risk premium of 20% was added to the discount rate to account for specific company and industry risk, bringing the total discount rate to 45.8%. This is on a par with the cost of equity for first-stage or “early-development” companies, they pointed out. Seigneur and Cram recently co-wrote a BVR Briefing: “Cannabis and Hemp Valuations: A Market Analysis.”

Extra: Cannabis sales are getting a boost in California to “ease minds” over the coronavirus, according to a report in the Hollywood Reporter.

“Read the Jones case,” an IRS official said when asked about the position the IRS is taking on tax affecting pass-through entities. In that case (Estate of Aaron Jones v. Commissioner, T.C. Memo. 2019-1011), the U.S. Tax Court, ruling on an Oregon gift tax dispute, accepted the taxpayers’ tax-affected valuations of pass-through entities without overturning Gross. The Tax Court’s decision was an all-out win for the taxpayers and came on the heels of the Kress case, in which a federal district court adopted the taxpayers’ tax-affected valuations of an S corp. During an upcoming four-hour workshop, former IRS manager Michael Gregory (Michael Gregory Consulting) will discuss the Jones case as well as other matters in How Recent Challenges With the IRS Impact Your Valuation, on March 31.

A digest of Estate of Aaron Jones v. Commissioner, T.C. Memo. 2019-101, as well as the court’s decision, is available to BVLaw subscribers.

That’s what Roberto H. Castro (Central Washington Appraisal, Economics & Forensics LLC and Gravis Law PLLC) says in his review of Best Practices—Thought Leadership in Valuation, Damages, and Transfer Price Analysis. The book, by Robert F. Reilly and Robert P. Schweihs, is 1,200 pages long, covering a wide range of topics, including the valuation of private-company securities and intangible assets, valuation for property tax purposes, valuation for ESOPs, fair value measurement for financial accounting purposes, transfer price analysis, and economic damages measurement. Castro’s review will appear in the April 2020 issue of Business Valuation Update.

Duff & Phelps has released the 1Q20 Greater China edition of its Valuation Insights series, which examines issues such as the Hong Kong Stock Exchange’s proposed rules on weighted voting rights for corporate shareholders, SFC issues circular for PE firms seeking license, U.S.-China trade deal phase one to impact intellectual property and tech transfer, new rules expand CFIUS jurisdiction over foreign investment in the U.S., China welcomes wholly foreign-owned futures companies in 2020, and the IVS 2020 update.

Concerns over the coronavirus have caused the Institute of Chartered Accountants in England and Wales (ICAEW) to postpone its Business Valuation 2020 conference that was to be held April 28. They tell us that they are considering September, but nothing has been decided. The new date will appear on the ICAEW events page. Scheduled speakers for this year’s event include Professors Pablo Fernandez and Ian Cooper; Andrew Strickland and Luke Morris; Vivek Mehan; HMRC’s SAV assistant director Steve Thomas; Jim Harrington from Duff & Phelps; EY’s chief UK economist Mark Gregory; and more.

Here’s what you’ll see:

• "Adult Nightclubs: Company-Specific Risk at the Extreme" (BVR Editor). David Shindel (ShindelRock) and Rod Burkert (Burkert Valuation Advisors) pull back the curtains of adult clubs to reveal their operating characteristics, special risks, and valuation nuances that push the limits of company-specific risk.

• "Latest Update on Proposal to Upend Goodwill Accounting"(BVR Editor). Goodwill remains a very important valuation topic globally this year, and Business Valuation Update continues to cover the responses to initial efforts in the consideration of whether to upend the current goodwill impairment model and revert back to one of amortization of the world’s goodwill assets.

• "Expanded 2020 Edition of Mergerstat Review Builds on Prior Enhancements" (BVR Editor). Amid the rapid pace of mergers and acquisitions, important changes have been made to the 2020 edition of Mergerstat Review, including the return of the Industry Analysis chapter and new tables of global transaction rankings.

• "Market Volatility and Its Impact on the Valuation Advisors Pre-IPO Database" (BVR Editor). The recent stock market volatility has ripple effects on pre-IPO studies, which are used to estimate a discount for lack of marketability (DLOM).

• "Book Review: Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis" (Roberto H. Castro, Central Washington Appraisal, Economics & Forensics LLC and Gravis Law PLLC). Review of a new book by Robert F. Reilly and Robert P. Schweihs of Willamette Management Associates.

• "Accounting Issues to Consider When Valuing Construction Firms" (Pasquale Rafanelli, Empire Valuation Consultants). Commercial and residential construction contractors use special methods of accounting that, if misunderstood by valuation analysts, can significantly impact a conclusion of value. This is a discussion of the main accounting issues for these firms.

The issue also includes:

• An expanded section of “BV News and Trends/Global BV News and Trends.”

• Regular features: “Ask the Experts” and “Tip of the Month.”

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the April 2020 issue of Business Valuation Update.

People: Curtis Clark, CPA, ABV, former partner of Clark Anderson McNelis & Co., has joined Harris CPAs of Idaho in the firm’s Coeur d’Alene office as a director as a result of the merger of the two firms; the firm also has offices in Boise and Meridian … Yann Magnan, former Duff & Phelps European leader, is chair of the new IVSC Europe Board; the board’s members are: Karthik Balisagar—managing director, economic and financial consulting, FTI Consulting; Giampiero Bambagioni—urban economist and bureau member of the UNECE Committee on Urban Development, Italy; Frank Bollmann—managing director, Vossius & Partner; Marc Broekema—partner and co-founder, BFI; Thomas Dimopoulos—founder and director, AXIA Chartered Surveyors; Jesús Federico Valero Gil—head of Economics, Valuation and Modelling Practice, Deloitte; Wolfgang Kälberer—member of the Steering Committee, HypZert GmbH; Christian Luft—head of Pan-EMEA Valuation, JLL; José Manuel Gómez Miguel—advisor, Spanish Association Value Analysis; Olesya Perepechko—vice president, Russian Society of Appraisers; Klaus Rabel—chair of the Business Valuation Working Group, Austrian Chamber of Public Accountants; and Javier Zoido—managing director, Iberia Valuations Leader, Duff & Phelps.

Firms: New York City-based Marcum has leased 22,000 square feet in the 777 Tower at 777 S. Figueroa St., making it one in a long line of Los Angeles businesses to move downtown; the firm will move from its current Century City location in May … Chicago-based Baker Tilly has acquired Madison, Wis.-based Talavant, a data analytics consulting firm, to expand Baker Tilly digital services … Due to growth, New York City-based Prager Metis CPAs has relocated its Woodbury, N.Y., office to a larger space in the same town on Long Island … MNP, Canada’s fifth-largest accounting and consulting firm, expands its presence and resources in Peace Region and Northern British Columbia with the acquisition of Schwab & Associates, an accounting firm with offices in Fort St. John and Chetwynd, British Columbia; the transaction is effective June 1.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• Valuing Rural Healthcare Clinics March 25, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET Featuring: Jessica Bailey-Wheaton (Health Capital Consultants) and Todd Zigrang (Health Capital Consultants)
  
  The number of transactions involving rural health clinics is expected to increase as demand for these services is propelled due to the aging baby boomer population. This webinar will review the competitive, reimbursement, regulatory, and technological environments in which these entities operate and discuss resulting valuation considerations and opportunities. This is part of BVR’s Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance.
  
  

• Recent Cases From the Delaware Chancery: What Appraisers Need to Know Now March 26, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET
  Featuring: Dr. G. William Kennedy (Duff & Phelps).
  
  A rundown of key valuation-related cases from the Delaware Chancery Court. Dr. Kennedy is a managing director in the Boston office of Duff & Phelps and has held various academic positions. He currently serves as adjunct professor for the graduate accounting program at Florida Atlantic University where he teaches a course on fair value measurement.