No Clear Winner in Today's Employee Stock Plan SCOTUS Decision
Employee Stock Ownership Plans (ESOP) operate in a weird plane between retirement funds that are meant to benefit employees and a means for employee "buy in" that should benefit the company. The administrator of a plan is supposed to further the latter aim, while maintaining a fiduciary duty to employees.
Smells like conflict of interest, right? That's exactly what happened with Fifth Third Bancorp, which used employee funds to purchase more company stock, even while the bank was engaged in the risky subprime mortgage market. (Spoiler alert: the bubble burst, and the stock price collapsed.)
Employees sued, arguing that the fiduciary duty was not met, while the bank pointed to a presumption of prudence in defending its actions. After today, the latter presumption doesn't exist, but even without a presumption, it's going to be hard for the employees to show that the administrator could have acted differently without illegally trading on inside information.
No Presumption? Bank Loses
The Employee Retirement Income Security Act of 1974 (ERISA), 29 U. S. C. §1104(a) places a duty of prudence in ESOP administrators' laps, but at the same time, exempts them from the requirement to diversify holdings (since the point of an ESOP is to have employees purchase employers' stock).
Lower courts have read these two points to mean that there is a presumption that an ESOP administrator's actions are prudent, unless the administrator dumps funds into obviously failing, verge-of-death company stock.
The Supreme Court, this morning, held that there is no such presumption in the statute, either explicit or implied. ESOP administrators are required to act with prudence, other than the explicit and narrow exemption from the duty to diversify holdings.
Revise Your Pleading? Employees Lose
It wasn't all bad news for the employers, however.
The second part of Justice Steven Breyer's opinion remands the case to the Sixth Circuit to consider whether the complaint meets the pleading standard of Iqbal and Twombly. Why?
"In 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."
Okay, relying on the public market's view of a stock isn't imprudent. What about insider information? The employees here wanted the company to either (1) dump stock; (2) stop purchasing company stock forever; or (3) publicly disclose the insider information and tank the company's stock price to correct the market.
Oh wait, that's right, trading on insider information is often illegal.
"[C]ourts should consider the extent to which an ERISA-based obligation either 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."
And, as the Court notes, dumping stock isn't a simple proposition -- if an ESOP drops its own stock, that signals to the rest of the world to also dump the stock, which could tank the ESOP's current holdings.
In short: short of breaking the law, or shooting itself in the foot, it's hard to see what an ESOP administrator in a troubled company can do. It'll be up to future plaintiffs, and this case's plaintiffs on remand, to plead some plausible alternative action.
- Fifth Third Bancorp v. Dudenhoeffer (Supreme Court)
- The Supreme Court Just Saved Investors from Themselves (Time)
- Equitable Rules Cannot Override Clear Terms of ERISA Plan (FindLaw's In House Blog)