Expert Opinion - ESOP Dispute

A company that was partially ESOP-owned redeemed all outstanding shares of stock held outside the ESOP based on a valuation of over $400 million. This was part of a tender offer transaction designed to leave the company 100% ESOP-owned. Several years after the transaction closed, the economy and the company’s industry changed dramatically, forcing the company into bankruptcy. The ESOP participants sued the selling shareholders for overpayment of their redemptions.

The selling shareholders engaged Stout to review the valuations and fairness opinions performed at the time of the redemption and determine whether the redemption price was more than fair market value. In addition, we performed extensive economic and industry research to re-create what was known or knowable at the time of the redemption. Our work exposed the fact that the ESOP participants’ expert’s opinion that there were damages in excess of $100 million was infected with hindsight bias and that his criticisms of the contemporaneous valuations relied on information that could not have been known at the time.

The court agreed with Stout’s expert on all aspects of his testimony, determining that there were zero damages. This opinion validated the ESOP’s financial advisor’s valuation process, addressing due diligence, analyses of company fundamentals and financial statements, financial projections, discounted cash flow methodology, economic and industry research, and other ESOP-specific considerations.

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