The Supreme Court issued a unanimous decision striking down the long-held “presumption of prudence” for fiduciaries to employee stock ownership plans (ESOPs). Although CAPTRUST does not advise clients on employer securities, we do want to share some high-level observations on this decision and potential impacts for clients offering employer stock in their plans.
To begin with, the Supreme Court cited that even though ESOP fiduciaries are exempt from the prudence requirement to diversify plan assets, they are not exempt from the overall duty of prudence applicable to all ERISA fiduciaries. This finding unwinds years of reliance by at least seven different courts of appeal on a presumption of prudence with regard to continued investment in employer securities in their plans. The court acknowledged the balance between Congress’ desire to encourage employee stock ownership and the fiduciary duty of prudence imposed by ERISA. Though the court clearly did not feel that this special presumption of prudence was allowed under ERISA for ESOPs, it did provide guidance to the lower courts to evaluate the plausibility of future cases involving ESOPs and the deterioration of share prices.
The court also rejected several other items. In particular, it rejected the defendant’s claim that, since the plan document required investment in employer stock, it had no choice in offering it and, as such, limited the need to oversee it. On this claim, the court noted that requirements in a plan document cannot override the fiduciary duties of ERISA.
For publicly traded companies, the justices proclaimed that the duty of prudence cannot require an ESOP fiduciary to perform an action that would violate securities laws. In this case the court rejected claims that a fiduciary violates the duty of prudence by not selling company stock on the basis of nonpublic information. The court suggests that lower courts would need to consider the impact of insider trading and disclosure requirements under federal securities laws to determine if the defendant could have reached a decision to refrain from buying additional shares based on nonpublic information. The court also asked the Securities and Exchange Commission to provide guidance.
This decision will impact ESOP plaintiffs in stock drop cases by requiring them to more clearly refine their claims, including “sufficient facts” demonstrating that a plan should have refrained from purchasing additional shares of stock. At the same time, defendants will have the ability to utilize securities laws that may preclude them from acting on nonpublic information or break the law.
Public companies offering employer stock as an investment option or an ESOP arrangement will want to review their plan documents, governance and committee structures and policies and procedures related to their plans and implement updates where needed.
For ESOPs that use closely held or nonpublic stock, this case establishes fiduciary duties for practical purposes as well. That being said, the vast majority (if not all) of the presumption of prudence cases have been brought against public companies. Enhanced requirements for sufficient facts at the pleading stage suggest that there may be minimal impact on the ESOPs of nonpublic companies.
Discuss this case with your advisors and legal counsel to be sure that they are apprised of the significance it may have for your plan and participants. For more information, contact your CAPTRUST Financial Advisor.