Congress has passed the Retire Through Ownership Act (S. 2403), bipartisan legislation intended to provide greater clarity regarding the valuation of closely held stock in employee stock ownership plan (“ESOP”) transactions. The Act is the latest in a long line of bipartisan measures intended to encourage the formation and expansion of employee ownership. 

If enacted, the legislation would amend ERISA’s definition of “adequate consideration” as it applies to closely-held companies to provide that an ESOP fiduciary may rely in good faith on a valuation prepared by an independent valuation expert or business appraiser who has relied on the principles and methodologies of IRS Revenue Ruling 59-60. 

The Act would hard-wire into the adequate consideration exemption principles that courts should already be applying. First, the Act reinforces the longstanding principle that ESOP trustees are not expected to be valuation experts themselves and may rely in good faith on qualified independent appraisers. In this way, it would reemphasize the importance of a fiduciary's process to the adequate consideration analysis. Second, by expressly incorporating Revenue Ruling 59-60 into the adequate consideration standard, the Act should help to refocus courts on high level valuation principles contained within Revenue Ruling 59-60—for example, that valuation is not an exact science, that fair market value is properly expressed as a range, and that valuation necessarily involves informed judgment and consideration of a range of factors.

Congress hopes that the Act will clarify the definition of adequate consideration in a way that will discourage the filing of meritless class action litigation. It will take some time to measure the results. The amendment applies to determinations of adequate consideration made on or after the date of enactment, so assuming it becomes law, it will likely be several years until courts are entertaining lawsuits involving transactions that are subject to the Act.