Yesterday, the Supreme Court issued its much anticipated decision in the stock-drop case, Fifth Third Bancorp v. Dudenhoeffer. The Court vacated the lower court decision that was adverse to the employer, Fifth Third Bancorp, and remanded the case to the lower courts for further proceedings.
Fiduciaries of employee stock ownership plans (ESOPs) had hoped that this decision would clarify their responsibilities for administering an employer stock fund. Although the decision leaves many questions unanswered, it does provide useful guidance for fiduciaries administering an employer stock fund in an ESOP:
- When administering an employer stock fund, a fiduciary is subject to the same standard of prudence that applies to all ERISA fiduciaries, except that there is no duty to diversify. As a result, there is no “presumption of prudence” with respect to an employer stock fund, as had been widely recognized by lower courts, and a fiduciary should generally continue to apply the same standard of prudence to an employer stock fund as it does to a plan’s other investment options.
- A fiduciary can rely on the fact that the market price of shares of the company’s stock accurately reflects the value of the stock, absent special circumstances. As a practical matter, this means that an allegation that a fiduciary should have recognized, from publicly available information alone, that the market was over- or undervaluing the stock generally will not survive a motion to dismiss.
- The duty of prudence does not require a fiduciary to break the law. Thus, a fiduciary is prohibited from using nonpublic information to take any action — such as selling a plan’s holdings of company stock on the basis of inside information — if doing so would violate the securities laws.
- The issues are more complicated when considering whether a fiduciary can use nonpublic information to refrain from making additional purchases of company stock or whether a fiduciary can disclose any nonpublic information to the public. These issues need to be evaluated in light of the complex insider trading and corporate disclosure requirements under the federal securities laws, and the U.S. Securities and Exchange Commission has not provided guidance on these matters.
- In evaluating whether to buy or sell shares of company stock or to disclose nonpublic information, a fiduciary may take into account whether the action will cause more harm than good to the plan. For example, ceasing purchases might cause the market to believe that the stock is a bad investment, and disclosing negative information to the public might cause the stock price to drop hurting all shareholders, including the plan.
- Fiduciaries should be protected from meritless stock-drop claims by the pleading standards that lower courts must apply in these cases. The Supreme Court made clear that a plausible duty-of-prudence claim must be based on specific allegations, and not just the fact that the price of the employer’s stock dropped and there were fiduciaries who had nonpublic information.
Many of these issues will continue to be argued in the lower courts, as they try to interpret the Supreme Court’s ruling. However, it seems clear from the Supreme Court’s opinion that it will be difficult for plaintiffs to bring stock-drop suits that can survive a motion to dismiss.
Covington & Burling LLP and Keating Muething & Klekamp PLL represented the employer, Fifth Third Bancorp, in the Supreme Court.