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Stout Expert Testimony Validates Fairness of Stock Valuation in $100MM ESOP Dispute

October 7, 2016

Defendants in an employee stock ownership plan (ESOP) valuation dispute recently scored a victory, as a court ruled in their favor and upheld the expert testimony of Jeffrey M. Risius.

Risius, a Managing Director in the Valuation & Financial Opinions Group at Stout Risius Ross, Inc. (Stout), provided expert testimony in Fish et al. & Evolve v. GreatBanc Trust Company et al., which centered on the valuation of The Antioch Company and fairness of ESOP-related share purchases in 2003. Antioch was the parent company of Creative Memories – a scrapbook and accessories direct marketing company. Risius was supported during the litigation by Aziz El-Tahch, a Managing Director in Stout’s ESOP & ERISA Advisory services group, and Jesse Ultz, a Managing Director in Stout’s Valuation Disputes practice.  

The court agreed with Risius on all aspects of his testimony, which validated the ESOP’s financial advisor’s valuation process in 2003, addressing due diligence, analyses of company fundamentals and financial statements, financial projections, discounted cash flow methodology, and other considerations. The court also favored Risius’ rebuttal of statements made by the Plaintiffs’ expert witness.

In its ruling, the court stated:

“The opinions of the Defendants’ expert witness Jeffrey Risius provide further credible and persuasive support for [the court’s] conclusion that no more than fair market value was paid for the non-ESOP shareholders’ stock, and that this determination was reached in good faith. Risius’ opinion that all aspects of [the original valuation expert’s] process for reaching its fairness and valuation opinions were reasonable and appropriate, that [its] methodology and valuation opinions were conservative based on what was known or knowable as of the date of the transaction, and that the $850 per-share value was at the ‘very low end’ of the range of fair market value for Antioch stock, are supported by the facts … and Risius’ experience, expertise, and independent research and valuation analysis.”

In December 2003, Antioch purchased all outstanding shares of its stock held outside of its ESOP for $850 per share as part of a tender offer transaction designed to leave the company 100% ESOP-owned. In 2008, the U.S. economy as well as the market for scrapbooks had changed dramatically, and Antioch was forced to reorganize its capital structure through a Chapter 11 bankruptcy. 

The Plaintiffs alleged that the ESOP’s shares of Antioch became worthless due to the 2003 transaction and the Defendants’ actions in connection with the transaction. The Plaintiffs claimed that the Defendants were liable for breaching their fiduciary duties to the ESOP, enabling other fiduciaries’ breaches, and causing a prohibited transaction in violation of sections 404, 405 and 406 of the Employee Retirement Income Security Act (ERISA).

At issue was the fairness of the transaction to the ESOP. Before the transaction, the ESOP’s financial advisor conducted financial and valuation analyses. It concluded that the proposed transaction – including the $850 per share to be paid by Antioch for the non-ESOP stock – was fair to the ESOP from a financial point of view. The Plaintiffs claimed that the fair market value of the stock was actually only $500 per share, and thus the non-ESOP shareholders were overpaid, causing damages to the Plaintiffs of over $100 million. 

After conducting independent market research and valuation analysis, Risius testified that the consideration paid in the transaction for the non-ESOP stock of $850 per share was at the very low end of the range of fair market value for Antioch stock at the time of the transaction. He also testified that opinions from the Plaintiffs’ expert witness were not credible or reliable due in part to being infected with hindsight bias.

The court entered a judgment in favor of the Defendants on all claims.

Stout Risius Ross, Inc. was retained by Keating Muething & Klekamp counsel for the Defendants. Judge Jorge L. Alonso, of the United States District Court for the Northern District of Illinois Eastern Division presided over a trial stretching over 32 days. 

To read the opinion, click here.