Forced Sale of Employer Stock no Fiduciary Breach

November 1, 2007 ( - The U.S. District Court for the District of New Jersey has ruled that plan fiduciaries did not breach their fiduciary duties under the Employee Retirement Income Security Act (ERISA) when they decided to force the sale of participant holdings in employer stock following the announcement of a corporate restructuring.

According to the opinion, during the relevant time period, the plan was prepared to enter into a statutorily prohibited transaction involving the issuance of warrants, Trump Hotels & Casinos Resorts (THCR) faced an uncertain future, and the financial markets responded accordingly to that uncertainty. “Faced with THCR’s tenuous position, defendants engaged in a reasoned decisionmaking process and employed appropriate investigative methods before deciding to force the sale of the plan’s remaining employer stock,” the opinion said.

The court noted the administrative committee’s decisionmaking process included: two formal meetings immediately following a New York Stock Exchange delisting and the second proposed restructuring, respectively, the purpose of which was to discuss the viability of the plan’s continued holding of employer stock; regular consultation with independent counsel, as well as present and future plan trustees; and extensive e-mail correspondence and memoranda discussing the prudence of continuing to hold employer stock.

The court determined this is precisely what the law requires, and held “there is insufficient evidence for a finder of fact to conclude that defendants breached their fiduciary duties of prudence under section 404 of ERISA.”

In early August, 2004, THCR contemplated a planned, prepackaged bankruptcy due to financial difficulties and publicly disclosed a proposed Chapter 11 bankruptcy. The Trump Capital Accumulation Plan’s administrative committee held a meeting the same day of the announcement and adopted a plan resolution that employer stock would no longer be an investment option for participants.

In September 2004, THCR issued a news release indicating the prepackaged bankruptcy was terminated and that THCR was pursuing alternatives to restructure and recapitalize the company. Approximately one month later a news release announced that a comprehensive restructuring plan was approved.

The Committee met again and concluded with a decision to “advise [401(k) Plan] participants that if they have not yet sold their [Employer Stock], effective November 15th 2004, the stock will be sold by Merrill Lynch,” according to the court document. Committee members testified that reasons for the forced sale included the potential of warrants being issued at some time in the future; THCR’s anticipated default on a $90 million bond payment due on November 28, which might negatively impact the employer stock; outside counsel’s advice that a sale was legally required; and general concern for the future value of the stock.

The plaintiffs contended in the suit that THCR’s restructuring plan was a success and that the resulting common stock in the recapitalized company and the warrants issued in May, 2005, proved to have significant value. They claimed the committee’s decision to force the sale of employer stock constituted a breach of their fiduciary duties that caused the class members to collectively lose over $2.3 million.

The court decision focused on the issue of the warrants to be potentially issued. The court pointed out that ERISA provides that a “qualifying employer security” includes stock, a marketable obligation, and an interest in a publicly traded partnership, and that the Department of Labor stated in an advisory opinion that “warrants to purchase employer securities generally would not constitute ‘qualifying employer securities’ under section 407(d)(5) of ERISA since they are neither stock nor marketable obligations.”

The defendants in the case pointed out the DOL’s opinion makes clear that holding warrants in an ERISA plan is a statutorily prohibited transaction, so they made a prudent decision by deciding to force the sale of all remaining employer stock in the plan.

The plaintiffs asserted that at the time of the Committee’s decision there was no statutory violation occurring that required the forced sale of the plan’s remaining employer stock and that the plan could have applied for a prohibited transaction exemption from the DoL.

The court said the plaintiffs’ arguments were contrary to ERISA’s requirements to specifically avoid entering into prohibited transactions. “It is certainly prudent for a fiduciary to consider that holding an investment may lead to future ownership of a prohibited investment in deciding whether to hold or divest that investment,” the court said.

In addition the court said, “At its core, plaintiffs’ assertion that defendants breached their fiduciary duties amounts to nothing more than a claim based on perfect hindsight.”

The decision in Noa v. Keyser, is here .