ESOP Valuation - Part 3

Who Hires the Appraiser?

In Part 2 of this article series on ESOP valuation we discussed the importance of vetting an ESOP appraiser and recommended some criteria for your deliberations.  Once a qualified appraiser has been selected, the next step is to hire him or her.

You would be excused if you answered the "Who Hires the Appraiser?" question in this article with, "Why, of course, a company's management or its board of directors hires the appraiser! Who doesn't know that?" Actually, in the ESOP arena, often the ESOP trustee is charged with hiring the appraiser, or more precisely, the independent financial advisor.  The most common exception to this is in the context of an early stage in the ESOP formation process commonly referred to as the "ESOP feasibility stage."  In this preliminary phase, either the board of directors or an ESOP exploratory committee will typically hire an appraiser to render a value of the employer stock.  This value will most likely turn into a key input in the decision-making process by the selling shareholder(s), who will eventually ask the all-important question, "With what I know about the value of my company's stock, does it make any sense to sell my stock to an ESOP?"

With ESOP transactions and fairness opinions, ESOP participant stock redemptions, annual ESOP administrative updates, and other ESOP situations requiring a valuation, the ESOP trustee is responsible for engaging the appraiser to "recommend" the value of the employer stock.  By the way, an ESOP trustee can be one person, an institution (e.g., trust company), or a committee made up of employees of the sponsor company.  As discussed in Part 1 of this article series, it is actually the ESOP trustee who by law is charged with setting the annual stock price, although ERISA law provides for substantial reliance on the appraiser's conclusion of value.  However, in practice it is very common for the trustee, more often than not, to use the appraiser's value conclusion.

While the trustee typically retains the appraiser, the sponsor company will be a co-signer of the appraiser's engagement letter, or contract, for a particular assignment.  The sponsor company signs the engagement letter because it is typically responsible for paying the appraiser's fee.  In addition, the sponsor company normally indemnifies the appraiser (and trustee, if it is an independent one) against any claims, actions, or damages in connection with the valuation work, other than for negligence on the part of the appraiser.

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