Stay informed on the latest legal developments impacting employee ownership. This page provides timely and concise summaries of key cases and rulings, contributed by experienced attorneys, to help the entire employee ownership community understand their implications, and also offers access to NCEO's archive of prior content.
Corey Rosen
In an Aug. 18, 2019, amicus brief to the Supreme Court in the case of Jander v. IBM, the Department of Labor argued that the proper standard for determining if a fiduciary should disclose insider information affecting company stock in a retirement plan should be what securities law requires.
Corey Rosen
In Cunningham v. Wawa et. al., No. 218-cv-03355-PD (E.D., Pa., July 2, 2019), over 1,000 former Wawa employees were granted class action in a lawsuit over changes in Wawa’s ESOP distribution rules. The same issue was the subject of a prior settlement that did not include these employees. Wawa is a very large chain of convenience markets whose ESOP owns over 40% of the stock. In the past, employees could hold onto shares after they left the company through age 68. That was changed to provide for account segregation when employees terminated. Account segregation moves funds into other investments—in this case Wawa’s 401(k) plan—prior to distribution. It is a common ESOP practice designed both to protect former participants from investment concentration risk and to make more shares available to current employees. ERISA allows companies to change the form of investment.
Corey Rosen
In Zavala v. Kruse-Western, Inc., No. 1:19-cv-00239-DAD-SKO (E.D. Cal., July 26, 2019), a district court ruled that GreatBanc Trust and the board of Kruse-Western must defend themselves in a lawsuit over the 90% drop in stock price following a $244 million ESOP buyout. The share price fell both because of leverage and a poisoning of horses that resulted from feed from Kruse-Western’s Western Milling division. The court said that GreatBanc was not exempt just because it obtained a proper valuation. It also ruled that the Dudenhoeffer standard, which allows trustees to defend themselves by arguing they cannot be presumed to be able to outguess the market, does not apply to private companies because it assumes public market information.
Corey Rosen
In O’Day v. Chatila, No. 18-2621 (2nd Cir., June 7, 2019, unpublished), the Second Circuit affirmed a lowa court ruling stating that employees had not alleged a sufficient claim to overcome the Dudenhoeffer rule that plaintiffs must show that defendants had a plausible alternative course of action with regard to company stock investments in a retirement plan that would not have done more harm than good. Plaintiffs contended SunEdison executives knew or should have known that the company was on the verge of bankruptcy and should have taken actions to protect employee interests with respect to the stock they had purchased or could have purchased in the company’s 401(k) plan. The court ruled that the defendants could not have been assumed to be able to outguess the market and that even if the defendants had inside information regarding SunEdison’s financial problems, disclosing this information could have done more harm than good. The court distinguished this case from the IBM case discussed above where the Sixth Circuit ruled that plaintiffs could proceed because such early disclosure might have done more good than harm. The court also ruled that the fact that the compensation of SunEdison defendants was linked to the
stock price was evidence that they acted imprudently.
Corey Rosen
In Retirement Plans Committee of IBM v. Jander, No. 18-1165 U.S. (certiorari granted June 3, 2019), the U.S. Supreme Court agreed to review a Second Circuit decision that could have a significant impact on how the Dudenhoeffer standard is interpreted. The Second Circuit had reversed and remanded a lower court ruling that found that the trustees of IBM’s ESOP were not in violation of their fiduciary duty when they failed to disclose that a major division of the company was overvalued. The lower court ruled that plaintiffs failed to show disclosure would not have done more harm than good. The Sixth Circuit, however, ruled that this standard is too strict, and that, in this case, plaintiffs credibly pled that disclosing this issue could at least possibly have done more good than harm. Only the Sixth Circuit has taken the view that this is possible in any stock drop case.
Corey Rosen
In Bloostein et al. v. Morrison Cohen LLP et al. No. 651241/2102, (Supreme Court of NY, Feb. 19, 2019), the law firm Morrison Cohen was denied a motion to dismiss a case against it arguing that advice it provided to sellers to multiple ESOPs caused them to lose their tax deferral in a Section 1042(a) transaction. The sellers paid $24 million in capital gains as a result. The sellers bought ESOP notes issued by Stonebridge Pass-Through Trust, with the bonds financed ultimately by Nomura International. Initially, the terms of the loan said that Nomura could sell the bonds if their grade dropped below a certain level, but at the last minute that was changed to allow a sale even if the insurance policy on the bonds fell. That latter event happened, and Nomura sold the bonds, creating a taxable event for sellers. Morrison Cohen said that it had relied on a tax opinion of another firm issued to the sellers, but the court decided that these opinions were not more than opinions, and that the plaintiffs could pursue their case against Morrison Cohen for not warning them of the potential risk. Morrison Cohen will appeal.
Corey Rosen
In Foster v. Adams & Assocs., Inc., No. 3:18-cv-02723-JSC, N.D. Cal., Feb. 26, 2019), a district court ruled that employees can proceed with a lawsuit alleging the ESOP at Adams & Associates overpaid for the shares and that the trustee for the plan, a former felon, should not have been appointed. The defendants argued the three-year tolling period should have started in 2013 when the company filed its 5500 form, but the court ruled that employees did not have actual knowledge of the breach until later. The court thus took the view that tolling does not start when there is constructive knowledge, as the Sixth Circuit has ruled, but actual knowledge, as had been ruled by the Ninth Circuit.
Corey Rosen
In Fentress v. Exxon Mobil, No. 4:16-cv-03484 (S.D. Tex, Feb. 4, 2019) a district court again rejected employee claims over the decline in Exxon Mobil stock price in their 401(k) plan. Employees alleged the company was inflating its actual oil reserves, causing the stock price to fall. The court ruled that the company could rely on the Dudenhoeffer standard that any alternative action would have done more harm than good.
Corey Rosen
In Acosta v. Saakvitne, No. 18-2019 BL18093 (D. Haw., Jan. 18, 2019), a district court denied motions to dismiss both the company, Bowers + Kubota Consulting, and the sellers to the company’s ESOP, for their alleged roles as fiduciaries. The DOL charged that the ESOP overpaid for the shares based on faulty revenue projections and sued the two parties as well as the trustee, Nicholas Saakvitne (who has since deceased). The company noted that the complaint did not allege any wrongdoing on the part of the company, but the court ruled that other violations might turn up at trial. The sellers argued that they did what they were supposed to do in appointing an independent fiduciary to handle the transaction, but the court ruled that sellers allegedly told Saakvitne that the company was worth $40 million, which may have made them functional fiduciaries and, in any event, they (as well as the company) had a duty to monitor the trustee as appointing fiduciaries. That raises important legal questions about what an appointing fiduciary should do if it finds the process being used appropriate, but disagrees with the price. That would make it a functional fiduciary and could be seen as an improper influence on the price.
Corey Rosen
In Cunningham v. Wawa, No. 2:18-cv-03355 (E.D. Pa., Feb. 18, 2019), Wawa partially agreed to allow plaintiffs to proceed with their action as a class, but reserved the right to challenge whether named plaintiffs are representative and whether affirmative defenses apply to any individuals. The case revolved around a change in Wawa’s distribution policy.
