ESOP Proposal Withdrawn by Trump Administration
President Donald Trump issued an executive order on Monday that froze all pending proposals from the Biden administration. The order also withdrew any proposal that has not yet been published in the Federal Register, which includes the recent proposal concerning employee stock ownership plans (ESOPs).
The ESOP proposal outlined how fiduciaries should appraise shares for ESOPs that lack a large market for their shares.
“Immediately withdraw any rules that have been sent to the [Office of the Federal Register] but not published in the Federal Register, so that they can be reviewed and approved,” the order read. The ESOP proposal was scheduled to be published in the Federal Register on Jan. 22 and is therefore withdrawn. The unpublished version has been removed from the Federal Register website.
Other proposals from other departments are suspended until they are reviewed by the incoming cabinet secretaries.
Reaction to the Proposal
The ESOP proposal was, in any case, poorly received by the ESOP industry. The ESOP Association said the main proposal as well as an accompanying safe harbor proposal “will require substantial modification if they are to further Congress’s goal of expanding employee ownership through ESOPs.”
The ESOP Association specifically objected to the proposal requirement of appraisal accuracy, instead of just requiring a prudent process. As for the safe harbor proposal, it “proposes criteria that virtually no ESOP transaction would satisfy.”
Corey Rosen, the founder of the National Center for Employee Ownership (NCEO) says that the “safe harbor proposal is one no one thinks will work. There are requirements in the proposal that are just not practical.”
Rosen adds that incoming Labor Secretary, Lori Chavez-DeRemer “has been very pro-ESOP and has a major ESOP company in her Congressional district,” a reference to Bob’s Red Mill, a food company that is a major employer in Chavez-DeRemer’s former Oregon congressional district.
The NCEO itself did not take a position on the proposal.
Brigen Winters, a principle at the Groom Law Group says that industry will need guidance on valuation substance requirements and not just process in any re-proposal. The DOL should discuss valuation principles and its views on them such that the concept of “fair market valuation” is understood by market actors.
Substantive valuation issues, such as warrants, stock appreciation rights, and controlling interests “are a constant source of litigation and enforcement activity,” and need to be clarified by DOL, Winters says.
The proposal is now moot, and it will be up to the incoming administration to decide how much, if any, of the Biden proposal it will keep when it issues its own proposal.