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Oct. 27 — 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.
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.
Although the Dudenhoeffer court didn't erect quite as high a barrier for participants bringing claims based on insider information, the panelists agreed that these types of claims were unlikely to result in quick victories for plan participants.
The panelists focused on Dudenhoeffer's pronouncement that stock-drop lawsuits based on insider information must identify an alternate, lawful course of action that plan fiduciaries could have taken that wouldn't have been more likely to do harm.
Hinson emphasized that securities laws prevent corporate insiders from dumping employer stock based on inside information. He added that the “spirit” of securities law also would disapprove of a fiduciary halting purchase on employer stock based on that information, noting that the Dudenhoeffer court focused on upholding both the letter and the spirit of securities laws.
The identification of an alternate course of conduct could prove very challenging for stock-drop plaintiffs, Wozniak said. If participants allege that fiduciaries should have disclosed certain inside information, they could run into problems if such disclosure would ultimately harm the stock's value in other ways, Wozniak said, including by derailing pending negotiations or sending troubling signals to the market.
In addition to instructing litigators, the Dudenhoeffer decision has raised questions for those who sponsor and design employer stock plans.
According to Hinson, pre-Dudenhoeffer decisions taught that adopting plan terms that mandated the inclusion of employer stock would provide some protection from fiduciary liability, because courts would extend a presumption of prudence to fiduciaries of plans that required or strongly encouraged investment in employer stock.
While the Dudenhoeffer court rejected this kind of “baking it in” to the plan document as a means of avoiding fiduciary liability, Hinson said he still would advise clients that wanted to include employer stock in their plans to adopt plan terms mandating that inclusion.
Both McElligott and Joseph M. Callow Jr., a partner with Keating Muething & Klekamp PLL in Cincinnati, agreed that plan fiduciaries still could find value in plan terms mandating investment in employer stock, with McElligott noting that the Employee Retirement Income Security Act still requires fiduciaries to act in accordance with plan terms.
Hinson raised another argument in favor of a mandate. Without a mandate, employer stock is “just like any other investment,” which raises the question of why a plan would offer a single undiversified security as a plan investment option in the first place, Hinson said.
The panelists also debated whether Dudenhoeffer should cause companies to consider removing employer stock from their retirement plans entirely.
McElligott emphasized that a particular company's corporate culture may weigh in favor of continuing to offer employer stock in the face of any inherent risks.
“Joe Six Pack and Mary Six Pack look at their 401(k)s as their primary investment vehicle, and they want to invest in company stock,” he said. “That's the whole reason it's there.”
McElligott added that it may be wise for employers to set limits on participants' abilities to invest in employer stock and make participant disclosures explaining the risk involved in investing in single securities.
However, he added that such precautions aren't a “silver bullet” that will insulate fiduciaries from all liability.
Further, he said that employers should be cautious in removing employer stock based on generalized assumptions about participants' best interests.
“To remove it entirely is a pretty heavy-handed generalization,” McElligott said. “You can't assume that even though someone is 100 percent invested in employer stock, it doesn't mean they're not otherwise diversified.”
Hinson made the point that any decision on whether to remove employer stock from a retirement plan should be made by the plan sponsor in a settlor capacity, rather than by a plan fiduciary.
Finally, the panelists discussed whether employers would be wise to appoint an independent fiduciary to oversee their employer stock plans—a move some companies may favor as a means of insulating plan fiduciaries from inside corporate information.
Hinson said that an independent fiduciary couldn't eliminate all litigation risk, but it could provide a certain level of protection from the “front lines” of litigation.
An independent fiduciary “takes you out of the bulls-eye,” because plaintiffs' lawyers “are going to think twice before suing you if you've got an independent fiduciary rather than a committee that was maybe asleep at the switch,” Hinson said.
McElligott was slightly less optimistic about the value of an independent fiduciary.
“It may be helpful, but it won't stop the complaint from coming in,” he said.
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