Employee Ownership Legal Digest (27) Archive

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

Another Stock-drop Case Fails

In Gernandt v. SandRidge Energy, Inc., No. 5:15-cv-00834-D (W.D. Okla., Nov. 18, 2018) a district court ruled that plaintiffs had not met the Dudenhoeffer standards of providing a plausible alternative course of action. The court issued separate rulings dismissing claims against SandRidge, Reliance Trust, and the company’s CEO. SandRidge’s employees lost the entire value of their accounts when the company went into bankruptcy. The judge said that the result “may seem harsh under the circumstances,” but is correct given the new standards for employer stock lawsuits.

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Corey Rosen

Lifetouch Lawsuit Dismissed

In Vigeant v. Meek, No. 0:18-cv-00577-JNETNL (D-Minn., Nov. 17, 2018), a judge dismissed a lawsuit against plaintiffs who alleged that Lifetouch stock dropped by more than $840 million between 2015 and 2018, resulting in an average loss of $22,000 per participant. This decline happened while several Lifetouch executives retired and cashed out their stock at favorable prices, the lawsuit claimed. Employees argued that executives at Lifetouch, which had been one of the largest and most successful ESOPs, artificially inflated the company’s value. Lifetouch was sold in 2017 to Shutterfly. The judge ruled that the actions of the defendants were reasonable given the financial hardships the photography company experienced in the changing market for its products. The judge also ruled against the argument that Lifetouch stock was too risky to be in a retirement plan.

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Corey Rosen

Selway Agrees to Settlement

In Barker v. Selway Corp., No. 9:18-cv- 00179 (D. Mont., petitioners’ motion for preliminary approval of settlement, Nov. 16, 2018) the parties agreed to an arbitrated $5.5 million settlement. Plaintiffs contended that a former owner of Selway continued as CEO, board member, and fiduciary of the ESOP, and took actions that harmed company value.

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Corey Rosen

WaWa Agrees to Settlement in Account Segregation Case

In Pfeifer v. Wawa, Inc., No. 2:16-cv-00497-PD (E.D. Pa., motion for settlement approval filed 12/29/17), the trustees of WaWa’s ESOP agreed to pay about 2,300 current and former employees $25 million ($5 million of which will go to attorney’s fees) in a case involving a plan amendment at WaWa that segregated account values for employees when they left the company. Plaintiffs said that Wawa had allowed them to keep their stock until they retired or turn 68, the point at which all beneficiaries are required to cash out. In 2015, WaWa changed that so that the shares were purchased after termination and held until normal distribution in other investments. Plaintiffs allege that that ended up costing them a lot of money because WaWa stock grew quickly. They also alleged WaWa used a prior value for the stock when it did this instead of what they allege was a more accurate recent number. Segregation is a common plan feature in which employee shares are cashed out at termination within the ESOP and invested prudently in other investments until distribution eventually occurs. The theory behind segregation is that it keeps the stock in the hands of current plan participants and decreases risk for former participants. WaWa’s ESOP owns about 43% of the shares. The iconic East Coast gas and convenience store chain employs over 30,000 people.

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Corey Rosen

Marathon Petroleum Executives Did Not Violate ERISA in Allowing Investment in Company Stock in 401(k) Plan

In Yates v. Nichols, No. 3:17-cv-01389-JGC 2017 (N.D. Ohio, order granting defendant’s motion to dismiss December 18, 2017), a court ruled that fiduciaries of Marathon’s 401(k) plan did not breach their fiduciary duties by allowing employees to invest in company stock in the company’s 401(k) plan.

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Corey Rosen

Ambiguous Stock Option Offer Letter Superseded by Subsequent Correspondence

In Vespremi v. Tesla Motors, Nos. A142391 and A143550 (Calif. Ct. or Appeals, First District, Div. Two, October 30 2017), a state court ruled that a plaintiff who had received an offer for stock options in Tesla could not receive any of the stock options he claimed he deserved. Vespremi contended that the offer letter was ambiguous as to when the awards vested; Tesla contended that it was clear they vested at 25% per year over four years, at the end of each service year. Vespremi was laid off after seven months. The court at first ruled that the language was ambiguous, but on appeal reconsidered, ruling that subsequent written communications made it clear that the awards would not vest before completion of each year of service. 

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Corey Rosen

Hewlett-Packard, Eaton Defeat Challenges to Stock in 401(k) Plans

In two unpublished decisions, Laffen v. Hewlett-Packard Co., No. 15-16360, (Ninth Cir., unpublished Ja. 9, 2018) and Graham v. Fearon, No. 17-3407, (Sixth Cir., unpublished Ja. 8, 2018), two circuit courts ruled for the defendants in stock drop lawsuits involving company stock in 401(k) plans. In both cases, plaintiff argued that alleged fraudulent accounting and reporting caused a drop in stock prices, but the courts in both cases ruled that the plaintiffs had not established a plausible alternative course of action as required under the Dudenhoeffer doctrine. The fact that the decisions were not published suggests the courts regard this as settled doctrine. The cases continue to show that the Dudenhoeffer ruling has made successful litigation on this issue exceptionally difficult.

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Corey Rosen

Wilmington Trust Cannot Transfer Lawsuit to Delaware

In Acosta v. Wilmington Tr., N.A., No. 1:17-cv-01755 (N.D. Ohio, order denying defendant’s motion to transfer venue 12/20/17), a court denied Wilmington Trust’s request to move jurisdiction in an ESOP lawsuit concerning valuation at Graphite Sales to Delaware. The court ruled that most of the plaintiffs are in Ohio and there was no cause to relocate the case. 

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Corey Rosen

One-Person ESOP Not Qualified

In Paza Staffing Servs. v. Commissioner, No. 18-1407 (3rd Cir. Nov. 2, 2018, unpublished), a circuit court ruled the IRS correctly disqualified an ESOP set up for a surgeon as the sole participant. The surgeon had five other employees. He set up a management company just for himself and set up an ESOP. The five employees were in a separate company controlled by the management company. Because it was part of a control group, the plan had to cover at least 70% of all non-highly compensated employees, and this covered none.

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