Supreme Court Rules on ESOP Case

On June 25, the Supreme Court ruled in Fifth Third Bancorp v. Dudenhoeffer that there is no presumption of prudence to protect fiduciaries of plans designed to invest in company stock, and specifically employee stock ownership plans (ESOPs).

While the decision eliminated the presumption of prudence rule, it replaces it with a pleading requirement that plaintiffs demonstrate the fiduciary acted imprudently. Most observers agree this will continue to make it difficult to challenge fiduciary decisions about employer stock, although the actual effect will not be known until lower courts begin to apply this ruling.

Based on this ruling, plaintiffs will be required to plausibly allege that (1) there were "special circumstances" requiring fiduciaries to recognize on the basis of public information that the market was over- or undervaluing the stock or (2) based on nonpublic information, the fiduciaries should have taken an alternative action that would not violate securities laws and would not do more harm than good.

The case concerned a public company, Fifth Third Bancorp, which had an ESOP as one component of its 401(k) plan. The company matched employee contributions by contributing stock to the ESOP. The Court clearly viewed this issue through the lens of a public company. The analysis and guidance it provides do not fit easily into a closely held company ESOP model. All of the presumption of prudence cases have been in public companies. This, combined with the enhanced pleading requirements, suggests the impact of this decision on private company ESOP fiduciary decisions will be minimal.

The ruling is available online, as are the NCEO's comments in What the Supreme Court's Dudenhoeffer Decision Means for ESOPs.