Polaroid Case Casts Doubt on Mirror Voting/Tendering

A federal judge has ruled that a trustee cannot follow employee directions on unallocated shares in an ESOP, nor use mirror voting on shares for which no directions are received. (Trustees can follow employee directions on allocated shares.) Instead, trustees must use their independent judgment to determine what is in the best interest of plan participants as plan participants and not as employees.

The case grew out of an ESOP at Polaroid that borrowed money to acquire 20% of the company's stock around the time a hostile takeover bid materialized. The plan called for the trustee to follow plan participant instructions concerning tendering and voting all shares. Unallocated and uninstructed shares were to be voted or tendered in the same proportion as allocated shares for which directions were received.

The court ruled this violated ERISA, which directs the trustee to use independent judgment for the best interest of plan participants. If the ruling holds up to possible further challenges, it would mean that ESOPs would become ineffective as public company takeover deterrents, and could even increase the risk of unfriendly acquisitions in private and public firms. Because trustees must focus on the interests of plan participants as plan participants, they will want to maximize plan asset value. While they can look to the long term in defining that, a high control premium could be hard to turn down.