Employer Stock Plan Fiduciaries Can Take Liability-Shielding Measures, Attorneys Say

Despite killing the fiduciary-friendly presumption of prudence, the U.S. Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 58 EBC 1405 (U.S. 2014), erected significant barriers for plaintiffs bringing stock-drop claims, attorneys said in a panel presentation.

The Dudenhoeffer ruling, while on its face benefitting participants in employer stock plans by eliminating a common defense to suits challenging declining stock value, arguably made it more difficult for plaintiffs to bring these challenges. The Dudenhoeffer court explained that claims based on publicly available information can't succeed absent “special circumstances,” while claims based on inside information require a showing of an alternate, lawful action that fiduciaries could have taken that wouldn't have been more likely to harm the plan.       

In the wake of Dudenhoeffer, fiduciaries of employer stock plans have a number of considerations that potentially could help insulate them from liability. The panelists discussed several possibilities, including the appointment of independent fiduciaries, removing or limiting employer stock from retirement plans and adopting plan terms that mandate investment in employer stock.

The panelists spoke Oct. 27 at the American Conference Institute's Eighth National Forum on ERISA Litigation, held Oct. 27-28 in New York. Their panel was titled: Fifth Third v. Dudenhoeffer: The Impact of the Decision on the Future of Stock Drop Cases and Litigation Regarding Plan Investments.

Special Circumstances

While participants no longer must show that their employer was on the brink of collapse in order to overcome a judge-made presumption, they now must identify nebulous “special circumstances” in order to bring claims based on publicly available information.

Identifying the special circumstances that will satisfy this requirement will be a challenge for future litigants, although the panelists hazarded a few guesses.

Todd D. Wozniak, a shareholder with Greenberg Traurig LLP in Atlanta, raised the possibility that “thinly-traded stock” might satisfy the newly articulated standard.

H. Douglas Hinson, a partner with Alston & Bird LLP in Washington, added that the federal courts have done little to elaborate on what special circumstances might entail in the four months since Dudenhoeffer was decided.

Hinson said that when the panelists began planning for this conference session in the aftermath of Dudenhoeffer, they expected to have many cases to discuss. However, Hinson said that “all that's been happening so far has been a bunch of remands.”

Further, new complaints filed following Dudenhoeffer generally haven't been making noteworthy arguments under the newly-articulated “special circumstances” standard, said James P. McElligott Jr., a partner with McGuireWoods LLP in Richmond, Va.

Given the absence of judicial guidance on special circumstances under Dudenhoeffer, Hinson quipped that he would refer clients to Justice Potter Stewart's famous line about obscenity.

“It's like the Supreme Court's definition of pornography: you'll know it when you see it,” Hinson said.

Regardless of how judges ultimately define special circumstances, the panelists appeared to agree that Dudenhoeffer‘s call for special circumstances makes it more difficult for employer stock plan participants to bring stock-drop claims based on publicly available information.

Excerpted from a story that ran in Pension & Benefits Daily (10/28/2014).