The Supreme Court recently released a decision of great importance in  relation to tax-qualified retirement plans commonly known as employee  stock ownership plans (ESOPs). The case is Fifth Third Bancorp et al v.  Dudenhoeffer et al., No. 12-571, June 25, 2014. The following are some  highlights. 

The main holding in this case relates to the mechanics of litigation.  If an ERISA breach of fiduciary claim is filed against an ESOP trustee  (or other plan fiduciary), the fiduciary does not have a “special  presumption” that the holding of, or purchase of, employer securities is  or was prudent. This will make it much harder for a fiduciary to get that  type of claim dismissed quickly (i.e., based solely on the pleadings).  Thus, this ruling is somewhat burdensome because it will most likely  lead to lengthier, more costly litigation in regard to these types of  claims.

Nevertheless, subsequent parts of the Supreme Court’s ruling could  be viewed as a bit more favorable for ESOP fiduciaries. In an attempt  to provide a framework for the early dismissal of meritless fiduciary  claims against ESOP fiduciaries, the Court stated that a complainant  must plausibly allege an alternative action that the fiduciary could have  taken, that would have been legal, and that a prudent fiduciary in the  same circumstances would not have viewed as more likely to harm the  ESOP than help it. To that end, the Court gave the following guidance:

  • If a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally  implausible, and thus insufficient to state a valid claim again the  fiduciary.
  • If a fiduciary is in possession of nonpublic information, the  fiduciary is never required to act on, or to otherwise disclose, that  information in a manner that would violate insider trading or other  securities laws.
  • A fiduciary also may have to consider whether any actions it may  take in relation to ceasing employer stock purchases of and/or  selling employer stock, might actually harm the ESOP via market  adjustments.

At this time, it is not clear how the foregoing statements by the Court  will affect the future of ESOP breach of fiduciary claim litigation. It is  quite possible that in many cases, the foregoing statements of the  Court will be beneficial to ESOP fiduciaries who seek a quick exit from  stock-drop lawsuits.

Finally, while this case would appear to have a negative impact in  regard to litigation matters where the employer stock in an ESOP  is publicly traded, it is not clear what impact, if any, the foregoing  statements of the Court may have on cases related to non-publicly  traded employer stock.