Only 141 ESOP Lawsuits Involving Private Companies Reach Court Over 20 Years

We have just completed a comprehensive review of ESOP and 401(k) plan litigation over the last 20 years and published it as ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010. In this review, we found only 141 ESOP cases involving closely held companies (plus 35 involving public companies), not counting a handful we did not include because they deal with issues tangential to current plans. The most important issues in these cases have been valuation, improper distributions, and questions about whether assets should have been diversified.

The review makes it very clear that companies that hire qualified professionals, follow good plan practices, and are not using the ESOP to extract money from the company for the benefit of a few people (often by stretching the law), are very unlikely to be sued, much less lose in court. On the public company front, the review shows that almost all the ESOP cases and about two-thirds of the 401(k) cases have been dismissed at the pleadings stage based on the so-called Moench presumption, which grants a presumption of prudence for investment in company stock, especially if the plan mandates employer securities as an investment. On issues of required disclosure, courts have fairly evenly split over whether fiduciaries must release non-public information.

The 35-page ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010, available at $75 for NCEO members and $150 for nonmembers, tracks almost 300 cases from 1990 to 2010, providing citations and categorizing the decisions by ESOPs and 401(k) plans and then by the kind of decision reached.