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ESOPs: Should You Consider an Interim Valuation? Covid-19

Value Management Inc.
Value Management Inc.

The spread of COVID-19 and the resulting economic uncertainty has caused employee stock ownership plan (ESOP) companies to question their 2019 stock valuations. This annual stock value is typically used for purposes of ESOP participant distributions and diversifications until the next annual valuation.   Only what was known or knowable as of the appraisal date should be considered in the valuation.  Therefore, December 31, 2019 ESOP valuations should not take into consideration the impact of COVID-19.  However, under certain circumstances, the ESOP plan administrator may declare an interim valuation date that is then used by the ESOP trustee to re-determine the stock value.

Given the unprecedented pace of events over the last few weeks and the resulting highly volatile markets, the question has arisen as to whether an interim valuation may be appropriate.  Some ESOPs have language in their plans that give the administrators the ability to set a special interim valuation date for extraordinary situations to protect the interest of participants in the ESOP.  This would include a significant change in economic conditions or market value of company stock.  If it is not included, the ESOP potentially could be amended to provide such ability on a prospective basis.  The decision to declare an interim valuation date is a fiduciary decision that must be made in the best interest of plan participants and beneficiaries, including participants who have terminated employment.  Other factors, such as prior practices of the company in other situations and the future handlings of significant events, may also come into play.

At this point, it is uncertain where the markets and the economy will settle.  It may be prudent to defer an interim valuation until more economic clarity becomes available. However, if your plan does not allow for the interim appraisal, contact your ESOP counsel to understand how long you can wait to process distributions and diversifications, and discuss the possibility of amending the plan and buying more time to make the decision on an interim valuation.

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