Bad Corporate News Not Dire Enough to Dump Company Stock

September 27, 2007 ( - The U.S 3rd Circuit Court of Appeals ruled that a communications networks company did not breach its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to get rid of the company stock option in its retirement plan when corporate developments led to a stock price drop.

According to Circuit Judge Julio M. Fuentes, writing for the three-judge appellate panel, the corporate bad news that hurt  the company’s earnings did not create the type of “dire situation” that would require Avaya to cease offering company stock or divest the retirement plans of company securities.

About $229 million of the plans’ $1.4 billion in assets were invested in company stock at the end of December 2004. Avaya offered three pension plans and each offered 23 different investment options for participants, one of which was a company stock fund, according to the opinion.

In April 2005, Avaya put out a quarterly earnings statement in which it announced it was unsure whether it would meet its earnings targets for the 2005 fiscal year. The company attributed the likely earnings miss to disruption in sales from the new delivery methods, costs associated with integrating recent acquisitions, and “potential softness” in the technology market.

The news prompted a 25% plummet in the company’s share price the next day from $10.69 to $8.01 per share.

The drop in stock value prompted a lawsuit by plan participant Jane Edgar on behalf of all participants who invested in the company stock fund between October 2004 to July 2005. She alleged that the company breached its fiduciary duty by continuing to offer the stock plan after announcing it would not reach its projected revenues and that Avaya issued materially misleading information about its financial condition that encouraged participants to invest in the stock fund.

The appellate court found that Edgar had not overcome the presumption that Avaya acted prudently by offering its common stock as an investment option.

Fuentes wrote that Avaya’s retirement plans are afforded many of the same exceptions as employee stock ownership plans in that a fiduciary who invests plan assets in employer stock is entitled to the presumption that it acted prudently.

Edgar would have had to show abuse of discretion in investing, the appellate court said. 

The court also said that plan documents make it clear that participants’ investments are linked to market performance, and said those “disclosures were sufficient to satisfy defendants’ obligation not to misinform participants about the risks associated with investment in the Avaya Stock Fund,” Fuentes wrote.

For the full opinion go here