Overview

On June 25, 2014, the United States Supreme Court, in a decision written by Justice Stephen Breyer in Fifth Third Bancorp v. Dudenhoeffer,unanimously rejected a more defendant-favorable presumption in so-called "stock-drop" litigations.1 In so doing, the Court ruled:

  • Fiduciaries of employee stock ownership plans ("ESOPs") are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") when challenged in court as to whether their decision to buy or hold employer securities in an ESOP was prudent; and
  • Instead, fiduciaries of ESOPs are subject to the same ERISA duty of prudence that applies to fiduciaries in general – except for ERISA's duty of diversification.

The Court effectively rejected the so-called "Moench Presumption," which held that "an ESOP fiduciary who invests the [ESOP's] assets in employer stock is entitled to a presumption that it acted consistently with ERISA."2 The Court also rejected similar authority from the Ninth Circuit and Seventh Circuits.3

Honorable Moenchion

Even though the Court rejected the Moench presumption, it provided some helpful pointers as to how Federal courts should adjudicate claims involving ERISA's prudence standard in an employer stock context:

  • ERISA Does Not Permit Violation of Federal Securities Laws. The Court noted that "ERISA as under the common law of trusts, does not require a fiduciary to break the law" and that "[a]s every Court of Appeals to address the question has held, ERISA's duty of prudence cannot require an ESOP fiduciary to perform an action – such as divesting the fund's holdings of the employer's stock on the basis of inside information – that would violate the securities laws."
  • Plaintiff Must Plausibly Allege a Less Harmful Alternative to the Action Taken by the Fiduciary. The Court noted that in any claim for breach of duty in an ESOP case, the plaintiff must allege an alternative action "that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it."
  • Balance of Conflicting Legal Regimes; Consideration of Adverse Market Signals by Insider Actions. In evaluating claims by plaintiffs for a breach of the duty of prudence, the Court also indicated that courts "should consider" whether "to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws." The opinion also stated that lower courts "should also consider" whether the complaint "has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases – which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment – or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund."
  • ESOPs with Publicly Traded Shares: Insights About Non-Insider Fiduciaries. The Court suggested that where plan fiduciaries do not otherwise have access to confidential nonpublic information, a claim for a breach of duty will likely face an uphill battle because "[a] fiduciary's fail[ure] to outsmart a presumptively efficient market . . . is . . . not a sound basis for imposing liability." In this regard, the Court expressly noted that "[i]n our view, 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." The Court also emphasized that "a fiduciary usually 'is not imprudent to assume that a major stock market . . . provides the best estimate of the value of the stocks traded on it that is available to him.'"4 Accordingly, future allegations that non-insiders violated a duty of prudence with respect to their company's stock in an ESOP by somehow failing to recognize circumstances beyond information that was publicly available to them could be challenging.

By Steven W. Rabitz, a Partner in the Employee Benefits and Executive Compensation Practice Group of Stroock & Stroock & Lavan LLP.

Footnotes

1. No. 12-751 (S.Ct. June 25, 2014). A copy of the opinion may be found at http://www.supremecourt.gov/opinions/13pdf/12-751_d18e.pdf.

2. Moench v. Robertson, 62 F. 3d 553, 571 (1995).

3. Quan v. Computer Sciences Corp., 623 F. 3d 870 (2010); White v. Marshall & Ilsley Corp., 714 F. 3d 98 (2013).

4. Internal citations in case omitted.

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