The US Labor Department is finalizing a regulation that has been in the making for over 36 years. The regulation will establish standards for appraising the value of companies being sold to their workers. The rule was sent to the White House Office of Information and Regulatory Affairs by the DOL’s Employee Benefits Security Administration last week, which is the final step before it can be formally proposed.
The regulation is expected to provide clear guidance on what the term “adequate consideration” means as it applies to a prohibited transaction exemption under the Employee Retirement Income Security Act. This exemption allows closely held companies to sell shares to workers. Employee stock ownership plans have been waiting for this regulation for years, as the absence of clear guidance has resulted in expensive audits and civil lawsuits against companies for allegedly inflating share values at the point of sale.
The EBSA first proposed an “adequate consideration” rule in 1988, but never finalized its text. The ESOP industry has been struggling without clear guidance, and the new regulation is expected to provide much-needed clarity and guidance to regulated plan sponsors and benefits advisers.
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