Lessons for Fiduciaries from an Employer Stock Divestment Case

Most practitioners are aware of the prodigious amount of stock-drop cases which have been brought against fiduciaries involving ERISA plans containing employer stock. The bulk of these cases have involved situations where the stock has plummeted in value due to…

Most practitioners are aware of the prodigious amount of stock-drop cases which have been brought against fiduciaries involving ERISA plans containing employer stock. The bulk of these cases have involved situations where the stock has plummeted in value due to various circumstances and the fiduciaries have been accused of violating their fiduciary duty for allowing the plan to hold on to the stock or for continuing to offer the stock as an investment of the plan. The case of Bunch v. W.R. Grace & Co. Savings and Investment Plan, an employer stock case recently decided by the First Circuit in favor of the fiduciaries, involves an interesting variation on this theme: the plaintiffs are complaining because the fiduciaries did not hold on to the stock. The stock was sold after it declined in value, but right before there was an upturn in value due to a third party who wanted to purchase the stock.

The case is good news for employers for the following reasons:

(1) For employers who are going through difficult times financially and have retirement plans holding employer stock, the case acts as a sort of “roadmap” for the fiduciaries of the plan on the “prudent process and procedures” fiduciaries should adhere to in managing the employer stock as an investment of the plan. The court particularly noted the following as being “prudent processes”:

  • The recognition by the appointed fiduciaries of the “potential conflict of interest” which they had in making the decision about whether the stock remained a prudent investment;
  • The resulting appointment of an independent fiduciary to make the decision;
  • The hiring of legal counsel and a financial advisor to assist the independent fiduciary in making its decision;
  • The independent fiduciary’s request for additional information from the financial advisor even after the financial advisor presented its findings;
  • The independent fiduciary’s documentation of its reason for determining that selling the stock was “the best course”;
  • Communication to participants that it was proceeding to divest the stock and that it would monitor the situation and might decide to end the sales effort if circumstances required it.

  • This paragraph of the opinion sums it up:

    There can be little doubt on this record that the state of Grace’s corporate health was thoroughly studied by experts who debated and considered ad nauseam the pros and cons of retaining or selling the stock held in the Plan’s portfolio. The unanimous conclusion of those charged with making the decision was that divestment of this stock was the only action consistent with the prudence required of a responsible fiduciary under ERISA. Without question, State Street engaged in a substantively sound, reasonable analysis of all relevant circumstances appropriate to the decision to sell the Grace stock. We cannot say that the district court’s approval of these actions was in error.

    Please note that the case only analyzes whether the fiduciaries fulfilled their duties during the period between the time that the stock had dropped in price through the time that it was later sold. Another case involving a separate group of participants (noted below) may involve an analysis of the time frame involved when the stock was declining in value.

    (2) Even for employers who do not have employer stock in their plans, the case demonstrates that “prudent processes and procedures” win the day. Fiduciaries need not be right in predicting what the market will do, but are only asked to employ prudent processes in making decisions. As the court stated:

    Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary’s actions under ERISA. . . The district court ruled that the test was not whether the best possible action was taken by State Street, but whether it had considered all relevant factors at the time of the divestment decision.

    Further notes:

  • Plaintiffs tried to argue that the “efficient market theory” dictated that the only prudent course of action was to hold on to the stock. The court upheld the district court’s conclusion that “the relevant inquiry was not whether the market price was the best predictor of share value, as claimed by appellants, but whether State Street took into account all relevant information in carrying out its fiduciary duties under ERISA.”

  • There is another group of plaintiffs which have sued the fiduciaries, asserting a a more traditional theory of liability. You can access the First Circuit’s opinion in that case here.

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