The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) proposed two major changes to Employee Stock Ownership Plans (ESOPs) on January 16, 2025. The first was new “adequate consideration” regulations under ERISA, aimed at clarifying how ESOPs determine fair market value for stock transactions. The second was a proposed prohibited transaction exemption (PTE), providing a safe harbor for fiduciaries and selling shareholders in ESOP transactions.
However, on January 20, 2025, the incoming administration froze all pending proposals, including these ESOP regulations. As a result, they were withdrawn from the Federal Register and currently have no legal effect. ESOP fiduciaries must continue relying on older 1988 guidance, which lacks clarity and has led to litigation over valuation methods.
The proposal was intended to codify standards for “adequate consideration,” ensuring a fair appraisal of share value within an ESOP. This is particularly important for companies without a liquid market for their shares, making valuation challenging. The absence of such a regulation is widely regarded as the primary legal risk ESOPs face.
With the freeze in place, the future of these regulations remains uncertain. The ESOP community continues to seek clearer, practical guidance to support employee ownership structures.
Frozen Proposals
Adequate Consideration Definition: The proposal aimed to clarify how ESOPs determine fair market value when buying or selling company stock. It required trustees to follow a prudent process and hire a qualified independent valuation expert. However, the rules were seen as overly complex, expecting trustees to review valuations in such detail that it amounted to duplicating the expert’s work.
Safe Harbor for Initial ESOP Purchases: A proposed safe harbor would have protected ESOP transactions from certain ERISA violations, but only for simple deals. Transactions involving preferred stock, convertible securities, or alternative financing structures wouldn’t have qualified, limiting flexibility for companies.
What’s Next?
With the regulatory freeze, ESOP fiduciaries must continue relying on 1988 guidance, which lacks clarity and has led to legal disputes over valuation methods. The new administration may propose a simpler, principles-based framework rather than detailed procedural mandates. The ESOP community continues to seek clear and practical rules to support employee ownership.
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