June 2017 | Issue 86
Background
Constellis Group, Inc. is a private security firm. In December 2013, the Company formed an Employee Stock Ownership Plan (“ESOP”), which purchased 100% of Constellis’s voting stock. Wilmington Trust NA was named Trustee of the ESOP. Less than a year after the ESOP was created, the ESOP sold all of its Constellis stock to a private equity firm (“ACADEMI”).
Certain ESOP beneficiaries believed that the December 2013 transaction occurred at a price that was greater than fair market value. The result was a class action suit by the ESOP against Wilmington Trust seeking to recover a claimed overpayment of $103,862,000. Brundle v. Wilmington Trust N.A., 2017 U.S. Dist. LEXIS 35811 (March 13, 2017).
Points of Contention
Both parties retained valuation experts to determine the fair market value of the stock. The experts disagreed on a number of the valuation issues typically encountered in valuations of this kind. Primary examples are; which cash flow projections to use in the DCF approach to value; and whether to apply a control premium or a lack of control discount to the valuation. A most unusual issue in this case, however, arose from the practice of the ESOP’s expert, (SSR), of consistently rounding numbers up when approximating values.
The ESOP’s expert (SSR) testified that it consistently rounded up whenever it needed to estimate values in its 2013 valuation reports.
Conclusion
Said the Judge, “Given the highly approximate nature of these valuations, it does seem natural that some rounding would take place. What does not make sense is why, given this latitude, SSR would round up, rather than down, when representing the buyer.”
The Court assessed $3 million in damages for the error attributable to rounding up. This was out of total damages of $30 million (rounded).
