Tag: ESOP

Key Recent Decisions in Employer Stock Plan Litigation

employee stockEach year, the National Center for Employee Ownership updates its employer stock litigation review (the ESOP and 401(k) Plan Employer Stock Litigation Review 1990–2016). Over the last 12 months, there has been a significant decline in litigation on this front, with only 21 new cases reaching the court, by far the fewest in recent years.  Seventeen dealt specifically with Employee Stock Ownership Plans, but only a few provided significant new guidance. Most dealt with legally non-controversial issues, such as distributions errors, attempts to set up ESOPs in companies with just one or two participants, and other administrative matters.

There were, however, some important decisions.

Standards of Review under the Dudenhoeffer Doctrine

The most important developments were in how the Supreme Court’s rulings on the Fifth Third v. Dudenhoeffer (Np. 12-751, U.S., June 25, 2014) would affect litigation. In that case, the Court dismissed the presumption of prudence for investing in employer stock that had long been the standard with a new pleading standard that required plaintiffs to plead a plausible alternative course of action for trustees that would not end up hurting more than helping. The standard clearly was designed with public companies in mind, but in two cases, it was applied by the courts to private companies, albeit in a very limited way. In public companies where prior decisions under the prudence presumption were remanded, the new standards have proven challenging for plaintiffs.

A number of cases were remanded after the ruling. In Tatum v. R.J. Reynolds Tobacco Co., No. 1:02-cv-00373-NCT-LPA (M.D.N.C, Feb. 18, 2016), a district court ruled for R.J. Reynolds, saying the fiduciary actions were reasonable under any standard of review. Similarly, in In re Lehman Bros. Sec. & ERISA Litig., No. 1:08-cv-05598-LAK (S.D.N.Y., July 10, 2015), the court ruled against the plaintiffs, this time saying they had failed to meet the heightened pleading standards that the Dudenhoeffer ruling set out. In Pfiel v. State Street Bank and Trust, No. 14-1491 (6th Cir., Nov. 10, 2015), the Sixth Circuit dismissed a claim by plaintiffs from GM arguing that GM stock should not have been an option in the company’s 401(k) plan, saying the efficient market theory provided that trustees could not be expected to outguess the market as to whether a particular stock is overpriced at any time. The Supreme Court declined to review the case in Pfiel. State Street Bank & Tr. Co., No. 15-1199 (U.S., cert. denied, June 27, 2016). The same logic was used to rule for the defendants in Coburn v. Evercore Tr. Co., N.A., No. 1:15-cv-00049-RBW (D.D.C., Feb. 17, 2016), with the court  specifically rejecting the argument that a fiduciary should have known from publicly available information alone that a stock’s price was “over or underpriced.”

Amgen Inc. et al. v. Steve Harris (U.S. no. 577, Jan. 25, 2016) presented a more complex scenario. The Supreme Court for the second time reversed the Ninth Circuit’s decision on the prudence of continuing to hold employer stock in Amgen’s 401(k) plan. The Ninth Circuit on remand said that the fiduciaries should have removed Amgen stock, which would have the same effect on the market as disclosure of the potentially adverse information. The Supreme Court ruled that a plausible argument could be made along these lines, but “the facts and allegations supporting that proposition should appear in the stockholders’ complaint. Having examined the complaint, the Court has not found sufficient facts and allegations to state a claim for breach of the duty of prudence.” The Supreme Court said that the complaint needs to claim an alternative action that “a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The district court can now decide it if wants to allow the stockholders to amend their complaint.

The Dudenhoeffer ruling was also extended to private companies in two cases, also with unfavorable results for plaiintiffs. In Allen v. GreatBanc Trust Co., No. 1:15-cv-03053 (N.D., Ill., October 1, 2015), the court dismissed a lawsuit against GreatBanc Trust in its role as a fiduciary in an ESOP transaction at Personal-Touch Home Care in a valuation case. The Court referred to the Dudenhoeffer Supreme Court case in ruling that “absent an allegation of special circumstances regarding, for example, a specific risk a fiduciary failed to properly assess, any fiduciary would be liable for at least discovery costs when the value of an asset declines. Such a circumstance cannot be the intention of Rule 8(a), or Dudenhoeffer. An allegation of a special circumstance is missing in this case—in fact, we know absolutely nothing about the financial situation of Personal-Touch.”

In Hill v. Hill Brothers Construction Co., No. 314-CV-213SAA (N.D. Miss., Sept. 11, 2015), a district court dismissed the plaintiff’s claims of a breach of fiduciary duty by the plan’s trustees, holding that plaintiffs had not shown that, under Dudenhoeffer there was an alternative action that “a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [plan] than to help it.” The court noted that although Dudenhoeffer applied mostly to public companies, “that does not necessarily preclude the application of the alternative action pleading standard to closely-held entities.”

Disclosure

Two cases came to different conclusions about financial disclosure requirements. Murray v. Invacare Corp., No. 1:13-cv-01882-DCN (N.D. Ohio, 8/28/15  found that there was a duty to disclose, but In re BP P.L.C. Sec. Litig., No. 4:10-MD-2185 (S.D.-Tex, Oct. 30, 2015) found there was not.

Other Decisions of Interest

 In Harper v. Conco ESOP Trs., No. 3:16-CV-00125-JHM (W.D. Ky., July 7, 2016), a district court ruled that employees of the bankrupt company Conco could not sell their stock for at least three years. The court affirmed a bankruptcy court’s ruling that was meant to give the company an opportunity to reorganize.

In Chesemore v. Fenkell, No. 14-3181, 14-3215, 15-3740, (7th Cir., July 7, 2016), the Seventh Circuit ruled that Alliance Holdings’ CEO David Fenkell had to indemnify the trustees of Trachte Building Systems. Trachte’s ESOP trustees, the courts argued, were controlled by Fenkell, thus making him a cofiduciary. The decision is at odds with rules for cofiduciary liability with the Eighth and Ninth Circuits.

In Perez v. Mueller, No. 13-C-1302, (E.D. Wis., May 27, 2016), a district court ruled that the Department of Labor could not make a blanket claim of privilege to prevent discovery of individual documents in an ESOP valuation case.

Finally, in Precise Systems Inc. v. U.S., No. 14-1147C (U.S. Court of Federal Claims, July 28, 2015), the court ruled that Precise Systems Inc. did not qualify for a service-disabled veteran-owned small business set-aside program. The company issued two “series” of common stock (A and B). Each share had one vote. A qualifying individual owned over 51% of the total voting shares. The ESOP shares, however, had an additional right pertaining to voting on a dividend and had a dividend preference. The company argued that they were the same class of shares, but the court agreed with the SBA and Office of Hearings Appeals rulings that they were two classes and, therefore, Precise Systems did not qualify.

ARTICLE BY Corey Rosen of The National Center for Employee Ownership              
 © 2016 by NCEO

Lehman Brothers Wins Stock Drop Lawsuit

Lehman brothers stock dropA New York federal appeals court once again rejected a breach of fiduciary duty claim against the now bankrupt Lehman Brothers brought by its employee stock ownership plan (ESOP) participants. In In Re: Lehman Bros. Sec. and ERISA Litig., No. 15-2229 (2d Cir. 2016), the US Court of Appeals for the Second Circuit on March 18 ruled that participants “failed to allege sufficiently” that plan fiduciaries violated their duties under the Employee Retirement Income Security Act (ERISA). The appeals court upheld an earlier July 15, 2015 decision by a US district court in New York to dismiss the complaint.

Soon after Lehman Brothers declared bankruptcy in September 2008, the ESOP participants sued, claiming that ESOP fiduciaries breached their fiduciary duties under ERISA “by continuing to permit investment in Lehman stock in the face of circumstances arguably foreshadowing its eventual demise,” the Second Circuit said. The New York district court dismissed the complaint for the first time in 2011, and the Second Circuit court upheld the dismissal in 2013. Both courts cited a long-held legal principle applicable to ESOPs—the presumption of prudence—to support the defendants’ request for dismissal.

However, in June 2014, the US Supreme Court nullified this long-standing presumption of prudence principle in a unanimous decision inFifth Third Bancorp, et. al. v Dudenhoeffer, et. al. According to the Supreme Court in the Dudenhoeffer decision, fiduciaries that evaluate an investment in employer stock may rely on its market price unless there are “special circumstances.” Specifically, the court held that “where a stock is publicly traded, allegations that a fiduciary should have recognized, from publicly available information alone, that the market was over or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” This means that the stock market price is the best estimate of employee stock value. But the Supreme Court did not address what it means by “special circumstances,” so, as a result, lower courts will need to determine when a plan fiduciary should have considered the market price as questionable.

Following Dudenhoeffer, the Lehman employees tried to establish special circumstances by pointing to orders issued by the US Securities and Exchange Commission (SEC) in summer 2008 that prohibited the short-selling of Lehman securities. They argued both that the orders described market conditions that constituted special circumstances and that the orders themselves qualified as special circumstances. The Second Circuit rejected this argument, explaining that the SEC orders “speak only conditionally” about the market effects of short sales.

This Second Circuit ruling marks the first time that a circuit court has applied the Supreme Court’s recent decision reaffirming the high hurdle facing employees who challenge company stock losses under ERISA (SeeAmgen Inc. v. Harris 136 S. Ct. 758 (US 2016)). This special circumstances requirement has derailed several lawsuits in the last two years, with courts dismissing claims involving the company stock plans of various major companies.

ARTICLE BY Brian D. Hector & Jason C. Ray of Morgan, Lewis & Bockius LLP
Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Recent Trends in ESOP Litigation — Employee Stock Ownership Plan

There has been a lot of attention in the world of employee ownership plans to the 2014 Supreme Court Decision in Fifth Third Bancorp v. Dudenhoeffer. In that case, the Court ruled that “the law does not create a special presumption favoring ESOP (Employee Stock Ownership Plan) fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” This ruling overturns the so-called Moench rule that has been applied to plan fiduciaries for certain 401(k) plans investing in company stock and ESOPs. Moench gave a presumption of prudence to plan fiduciaries unless they knew or should have known the company was in dire financial circumstances.

As important as this ruling is, it actually has very little if any impact on the vast majority of ESOPs, over 95% of which are in closely held companies. The ruling is far more important for public companies with 401(k) plans or ESOPs that offer company stock as an investment choice.

First, it is important to distinguish between a statutory ESOP and what courts came, by a rather tortured logic, to call ESOPs—namely any defined contribution plan that had company stock in it. ESOPs were created as part of ERISA in 1974 and given not just the right but the requirement to invest primarily in employer securities. ESOPs were specifically created to encourage employers to share ownership with employees, and over the years Congress has given these plans a number of special tax benefits. Because fiduciaries are required to invest primarily in employer stock, standard fiduciary obligations concerning diversification in retirement plans would be impractical. The Moench presumption was created in a case involving a statutory ESOP.

The large majority of “stock drop” cases, however, have not involved statutory ESOPs, but 401(k) plans that either allowed employees to invest in company stock and/or matched in company stock. Some of these plans required fiduciaries to offer company stock; others made it optional. Defense attorneys argued that these plans were actually “ESOPs” too and were subject to the Moench presumption. Most district and circuit courts bought that argument, although some applied it only when company stock was required. That, I think, was unfortunate and inappropriate. 401(k) plans were never meant to be vehicles for sharing corporate ownership. They are intended to be safe, cost-effective retirement plans. ESOPs are a specific statutory creation with a specific set of rules and purposes.

When reading the Supreme Court decision, as well as the arguments made before the Court, it is also clear that the justices were thinking entirely of public companies. There is virtually no discussion of ESOPs in closely held companies, and the key tests that the Court now requires plaintiffs to meet in stock drop cases largely do not apply to privately held companies. Since the original Moench decision in 1995, we at the National Center for Employee Ownership have only found two cases in closely held companies that were decided even in part based on that presumption.

The Court’s decision in the Fifth Third case laid out three key hurdles for plaintiffs to overcome to prevail. The first states that it is insufficient to argue that fiduciaries should be able to outguess the market based on publicly available information. The second issue is whether decisions to sell company stock in light of inside information could be prudently taken in light of their potential impact on the prices of company stock. Fiduciaries are also not obligated to violate securities laws. Finally, the Court said plaintiffs must allege a reasonable alternative course of action.

In ESOPs in closely held companies, fiduciaries have few options that could form the basis for plaintiffs arguing a plausible course of action. First, the law requires that ESOPs be primarily invested in company stock. Second, the only liquidity options are a company buy-back of shares, which is probably impractical if the company is already in financial distress, or a sale of the company. But a fire sale like that would mean an even lower price for plan participants. As noted in more detail below, none of the presumption of prudence cases has concerned closely held companies, probably because of these issues. Also note that Dudenhoeffer distinguished between relying on inside information to sell company stock (which it classified as illegal insider trading and thus not required by the duty of prudence) and refraining from buying more company stock (which might be a fiduciary violation). The purchase of shares by an ESOP is already subject to substantial statutory and case law requirements, and this decision is unlikely to change the way these cases are contested.

As a result of all this, the prudence presumption has so far not been an issue for closely held ESOP companies in court, and it is likely to continue not to be as plaintiffs would have a hard time indicating what fiduciaries should have done. Instead, cases will continue to focus, as they have been before where there are alleged problems, on the initial sale price of the shares of the ESOP, which is determined by the trustee and relies on an outside appraiser. It is possible that the Dudenhoeffer decision may embolden the plaintiffs’ bar to initiate more lawsuits, but we would expect that to continue to be primarily in public companies.

Beyond Fifth Third—ESOPs Law for the 97%

Valuations

The 97% of ESOP companies that are closely held will not be much affected by the Supreme Court decision, but the last 25 years of litigation on ESOPs reveals some important trends that should be considered.

In an analysis by the NCEO of the 224 decisions courts have made on ESOPs in closely held companies between 1990 and 2014, we found that many of the suits involved plan management issues, such as failing to make distributions. The most significant issues, however, concerned valuation, indemnification, and fiduciary duties.

The valuation decisions are mixed. Courts have focused more on process than outcome. Some processes are clearly unacceptable, such as not hiring an independent appraiser or influencing an appraiser’s report. Several key best practices have emerged. A recent settlement between the Department of Labor and GreatBanc Trust in a valuation case (Perez v. GreatBanc Trust Co., 5:12-cv-01648-R-DTB (C.D. Cal., proposed settlement agreement filed June 2, 2014) set out terms for GreatBanc to follow in future engagements that does a good job of summarizing the trends in the courts.

Key points in the settlement included:

  • Trustees must be able to show that they vetted the independence and qualifications of appraisers carefully.
  • Trustees must show that they have assessed the reasonableness of financial projections given to the appraiser. Some valuation advisors include disclaimers in their engagement agreements that the DOL reads as too broad, in that read literally the valuation advisor can rely on any information it receives from the plan sponsor company without inquiring as to its reasonableness, no matter how unreasonable the information. The use of these disclaimers will not absolve the trustee of responsibility and the trustee should document how the appraisal firm has analyzed just how reliable projections are.
  • The trustee should consider how plan provisions, such as those relating to puts, diversification, and distribution policies, might affect the plan sponsor’s repurchase obligation.
  • The trustee should consider the company’s ability to service the debt if projections are not met.
  • Documentation should be detailed. While documentation of the valuation analysis may appear to be burdensome, making the effort to document the valuation review process at the time of the transaction can only benefit the valuation advisor and the trustee in later years.

Indemnification

The other significant legal development for closely held company ESOPs in recent years concerns indemnification, ironically also in the case involving Sierra Aluminum and GrratBanc. In Harris v. GreatBanc Trust Co., Sierra Aluminum Co., & Sierra Aluminum ESOP, No. 5:12-cv-01648-R (C.D. Cal. Mar. 15, 2013), a district court ruled that GreatBanc could be indemnified for its role as the ESOP fiduciary. The decision is significant in that it occurred in the one circuit (the Ninth) that has taken the position that indemnification should not be allowed, especially in a 100% ESOP.  In Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009), the court ruled that ESOP plan assets were not distinguishable from company assets. If plaintiffs prevailed but the company’s indemnification had paid out millions in legal fees to defendants (as was the case here), the plaintiffs would have a very hollow victory. In that same circuit, in Fernandez et al. v. K-M Industries Holding Co., No. C 06-7339 CW (N.D. Cal. Aug. 21, 2009), a court that an indemnification agreement did not apply in the case of a 42% ESOP because if alleged ERISA violations concerning an improper valuation were sustained, the indemnification would harm the value of participant stock.

These decisions seemed to make indemnification largely moot, but in the GreatBanc case the court ruled that regulations (29 C.F.R. § 2510.3-101(h)(3)) of ERISA Section 410 state that in the case of an ESOP, the plan’s assets and the company assets are treated as separate.  In Couturier, the Harris court said, the company had already been liquidated and was thus no longer an operating company. The court also distinguished this case from Couturier in that in Couturier, plaintiffs had already shown likelihood to prevail on fiduciary charges, something that could not be said of this case. Finally, the Couturier case involved no exceptions for breaches of fiduciary duty, as was the case here, but only for “gross negligence” and “willful misconduct.”

Other courts in other circuits have not weighed in on this issue. Certainly a good argument can be made that if indemnification means that plaintiffs will lose a substantial amount of a settlement agreement because there is no money to pay, it seems compelling indemnification should not apply. That would not be the case if the company had other available assets. In any event, ESOP advisors now caution clients that indemnification may have limited value and that they should rely primarily on adequate fiduciary insurance.

Conclusion

In recent years, the Department of Labor has been more aggressive in pursuing what it perceives as valuation abuses in ESOP companies. While there have been a few more court cases and settlements per year than normal, a typical year finds only a handful of these out of the 6,500 or so ESOPs in closely held companies. A comprehensive study by the NCEO found that the default rate on leveraged ESOPs (those that borrow money to buy stock, which most do) is just .2% per year, way below other LBOs. If valuations really were routinely excessive, this number would be higher as the debt burden would be unrealistic.

Other ESOP litigation has been relatively mundane, focusing either on administrative errors or the occasional fraudulent behavior. Indemnification could become a more important issue, but companies can (and should) resolve that with proper fiduciary insurance.

The future for company stock in public company retirement plans, mostly 401(k) plan, is far less certain. There has been a steady decline in how many companies offer this and how much those that do rely on it.  Even for advocates of employee ownership, however, this is not necessarily a bad thing. Good ESOP companies have secondary diversified retirement plans—in fact, ESOP companies are more likely to have a diversified retirement plan than other companies are to have any plan. That is a best practice we strongly encourage.

ARTICLE BY

Corey Rosen
OF
The National Center for Employee Ownership

The Supreme Court of the United States Holds that ESOP Fiduciaries are not Entitled to a Presumption of Prudence, Clarifies Standards for Stock Drop Claims

Dickinson Wright Logo

On June 25, 2014, the Supreme Court of the United States unanimously held that there is no special presumption of prudence for fiduciaries of employee stock ownership plans (“ESOPs”). Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. ___ (June 25, 2014) (slip op.).

Background

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) imposes legal duties on fiduciaries of employee benefit plans, including ESOPs.[1] Specifically, ERISA requires the fiduciary of an employee benefit plan to act prudently in managing the plan’s assets.[2] In addition, ERISA requires the fiduciary to diversify plan assets.[3]

ESOPs are designed to be invested primarily in employer securities.[4] ERISA exempts ESOP fiduciaries from the duty of diversify plan assets and from the duty to prudently manage plan assets, but only to the extent that prudence requires diversification of plan assets.[5]

The recent financial crisis generated a wave of ERISA “stock drop” cases, which were filed after a precipitous drop in the value of employer securities held in an ESOP. Generally, the plaintiff alleged that the ESOP fiduciary breached its duty of prudence by investing in employer securities or continuing to offer employer securities as an investment alternative. Defendant fiduciaries defended on the ground that the plaintiff failed to rebut the legal presumption that the fiduciary acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.

The Federal Circuit Courts of Appeals that had considered the issue adopted the rebuttable presumption of prudence but split on the issues of (1) whether the legal presumption applied at the pleadings stage of litigation or whether the legal presumption was evidentiary in nature and did not apply at the pleadings stage of litigation and (2) the rebuttal standard that the plaintiff of a stock drop action must satisfy.[6]

Dudenhoeffer held that ESOP fiduciaries are not entitled to a legal presumption that they acted prudently by investing in employer securities or continuing to offer employer securities as an investment alternative.[7]

The Dudenhoeffer Case

Fifth Third Bancorp maintained a defined contribution plan, which offered participants a number of investment alternatives, including the company’s ESOP. The terms of the ESOP required that its assets be “invested primarily in shares of common stock of Fifth Third [Bancorp].”[8] The company offered a matching contribution that was initially invested in the ESOP. In addition, participants could make elective deferrals to the ESOP.

ESOP participants alleged that the ESOP fiduciaries knew or should have known on the basis of public information that the employer securities were overvalued and an excessively risky investment. In addition, the ESOP fiduciaries knew or should have known on the basis of non-public information that the employer securities were overvalued. Plaintiffs contended that a prudent ESOP fiduciary would have responded to this public and non-public information by (1) divesting the ESOP of employer securities, (2) refraining from investing in employer securities, (3) cancelling the ESOP investment alternative, and (4) disclosing non-public information to adjust the market price of the employer securities.

Procedural Posture

The United States District Court for the Southern District of Ohio dismissed the complaint for failure to state a claim, holding that ESOP fiduciaries were entitled to a presumption of prudence with respect to their collective decisions to invest in employer securities and continue to offer employer securities as an investment alternative.[9] The District Court concluded that presumption of prudence applied at the pleadings stage of litigation and that the plaintiffs failed to rebut the presumption.[10]

The United States Court of Appeals for the Sixth Circuit reversed the District Court judgment, holding that the presumption of prudence is evidentiary in nature and does not apply at the pleadings stage of litigation.[11] The Sixth Circuit concluded that the complaint stated a claim for a breach of the fiduciary duty of prudence.[12]

ESOP Fiduciaries Not Entitled to Presumption of Prudence

In a unanimous decision, the Supreme Court of the United States held that ESOP fiduciaries are not entitled to a presumption of prudence with regard to their decisions to invest in employer securities and continue to offer employer securities as an investment alternative; rather, ESOP fiduciaries are subject to the same duty of prudence that applies to other ERISA fiduciaries, except that ESOP fiduciaries need not diversify plan assets.[13]

The Court began its analysis b
y acknowledging a tension within the statutory framework of ERISA. On the one hand, ERISA imposes a duty on all fiduciaries to discharge their duties prudently, which includes an obligation to diversify plan assets. On the other hand, ERISA recognizes that ESOPs are designed to invest primarily in employer securities and are not intended to hold diversified assets. The Court concluded that an ESOP fiduciary is not subject to the duty of prudence to the extent that the legal obligation requires the ESOP fiduciary to diversify plan assets. The Court found no special legal presumption favoring ESOP fiduciaries.

New Standards for Stock Drop Claims

Although the Court rejected the presumption of prudence, it vacated the judgment of the Sixth Circuit Court of Appeals (which held that the complaint properly stated a claim) and announced new standards for lower courts to observe in evaluating whether a complaint properly pleads a claim that an ESOP fiduciary breached its fiduciary duty of prudence by investing in employer securities or continuing to offer employer securities as an investment alternative.

Public Information

First, the Court concluded that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”[14] In other words, a plaintiff generally cannot state a plausible claim of imprudence based solely on publicly available information. An ESOP fiduciary does not necessarily act imprudently by observing the efficient market theory, which holds that a major stock market provides the best estimate of the value of employer securities. To be clear, the Court did not rule out the possibility that a plaintiff could properly plead imprudence based on publicly available information indicating special circumstances affecting the reliability of the market price.

Non-Public Information

Second, the Court concluded that “[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the [fiduciary] could have taken that would have been consistent with [applicable Federal and state securities laws] and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [ESOP] than to help it.”[15]

The Court reasoned that where a complaint alleges imprudence based on an ESOP fiduciary’s failure to act on non-public information, a lower court’s analysis should be guided by three considerations. First, ERISA does not require a fiduciary to violate applicable Federal and state securities laws. In other words, an ESOP fiduciary does not act imprudently by declining to divest the ESOP of employer securities or by prohibiting investments in employer securities on the basis of non-public information. Second, where a complaint faults fiduciaries for failing to decide, on the basis of non-public information, to refrain from making additional investments in employer securities or for failing to disclose non-public information to correct the valuation of the employer securities, lower courts should consider the extent to which the duty of prudence conflicts with complex insider trading and corporate disclosure requirements imposed by Federal securities laws or the objectives of such laws. Third, lower courts should consider whether the complaint has plausibly alleged that a prudent fiduciary could not have concluded that discontinuing investments in employer securities or disclosing adverse, non-public information to the public, or taking any other action suggested by the plaintiff would result in more harm than good to the ESOP by causing a drop in the value of the employer securities.

Quantifying the Unknowns

Fifth Third Bancorp v. Dudenhoeffer will undoubtedly reshape the landscape of ERISA litigation and, specifically, stock drop litigation. To fully understand the decision’s impact, a number of questions must still be answered, including the correct application of the standards espoused by the Court. In addition, Dudenhoeffer involved a publicly-traded company; it is unclear what application, if any, the decision will have in the context of employer securities of a privately held company.

Article By:

Christopher T. Horner
Eric W. Gregory
 
Of: 
Dickinson Wright PLLC

 

[1] See generally, ERISA § 404(a).

[2] ERISA § 404(a)(1)(B).

[3] ERISA § 404(a)(1)(C).

[4] Code § 4975(e)(7)(A).

[5] ERISA § 404(a)(2).

[6] See e.g. Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995); In re Citigroup ERISA Litig., 662 F.3d 128, 138 (2d Cir. 2011); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); White v. Marshall & Ilsley Corp., Case No. 11-2660, 2013 WL 1688918 (7th Cir. Apr. 19, 2013); Quan v. Computer Sciences Corp., 623 F.3d 870, 881 (9th Cir. 2010);Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012).

[7] No. 12-751, 573 U.S. ____ at 1-2.

[8] Id.

[9] Dudenhoeffer v. Fifth Third Bancorp, Inc., 757 F. Supp. 2d 753, 759 (S.D. Ohio 2010).

[10] Id. At 762.

[11] Dudenhoeffer v. Fifth Third Bancorp, 692 F. 3d 410, 418-19 (2012).

[12] Id. At 423.

[13] Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. ___ at 1-2.

[14] Id. At 16.

[15] Id. At 18.