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2013 ESOP Legal Update

An NCEO Issue Brief

(Print Version)

by Authored by Lynn Archer, Theodore M. Becker, Gregory K. Brown, Stanley E. Bulua, Lars C. Golumbic, Julie Govreau, Steven L. Greenapple, Sharon Hearn, Jeffrey S. Kahn, Emily C. Lechner, Susan Lenczewski, Susan Peters Schaefer, Robert F. Schatz, and Allison T. Wilkerson

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This issue brief summarizes judicial and regulatory developments during the previous year (2012) affecting employee stock ownership plans (ESOPs) and 401(k) defined contribution plans that invest in employer stock. Interesting cases during 2012 included, for example, Chesemore v. Alliance Holding Inc., in which the U.S. District Court for the Western District of Wisconsin held several defendants liable in connection with an ESOP spinoff. There continued to be a number of stock drop cases, such as Lanfear v. Home Depot, Inc., in which the Eleventh Circuit joined several other circuits in adopting the Moench presumption but split with the Sixth Circuit with respect to when the Moench presumption may be applied. As before, the Internal Revenue Service (IRS) continued its efforts to improve the determination letter process. The IRS also issued private letter rulings on whether employer securities traded on the Over-the-Counter Bulletin Board qualify as "publicly traded employer securities" and regarding the transfer of employer securities from the defined contribution plan at a parent company to a comparable plan established at a subsidiary during a corporate restructuring.

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Publication Details

Format: Perfect-bound book, 22 pages
Publication date: June 2013
Status: In stock

Contents

Preface

Case Law
Fiduciary Cases: General
Fiduciary Cases: Stock Drop Cases
Fiduciary Cases: Corporate v. Fiduciary Actions
Fiduciary Cases: Remedies
Statute of Limitations
Claims
Plan Disqualification
Inaccurate Summary Plan Description

Regulatory Developments
Determination Letters
Private Letter Rulings
IRS Form 8955-SSA
DOL Fee Disclosure Regulations Take Effect

Excerpts

From "Case Law"

In the case of Lanfear v. Home Depot, Inc. 679 F.3d 1267 (11th Cir. May 2012) the Eleventh Circuit entered the stock drop fray. In its Lanfear opinion, the Eleventh Circuit joined several other circuits in adopting the Moench presumption, but split with the Sixth Circuit with respect to when the Moench presumption may be applied.

In Lanfear, the plaintiffs were participants in the Home Depot FutureBuilders Plan, which was an ESOP and an eligible individual account plan (EIAP) with a company stock fund. From 2002 through 2006 accounting improprieties occurred at Home Depot: improper accounting of return-to-vendor chargebacks, and backdated stock option grants. Both errors resulted in corrections of the company's financial statements. Based on data provided at the trial, it appears the value of the Home Depot stock declined approximately 16% during the time at issue, although it subsequently recovered.

The plaintiffs claimed that because the stock was overvalued due to these errors, it became an imprudent investment. The plaintiffs alleged that the defendants breached fiduciary duty of prudence by continuing to offer the company stock fund in the plan and breached their fiduciary duty of loyalty because of erroneous financials on the company's securities filings, which were incorporated by reference into the plan's summary plan descriptions. The U.S. District Court for the Northern District of Georgia granted the defendants' motion to dismiss all the claims, so the plaintiffs appealed to the Eleventh Circuit.