Despite that fact that Coca-Cola’s stock dropped from $66.50 per share in May 1997 to $40.97 in April 2005, US District Judge Orinda Evans of the US District Court for the Northern District of Georgia pointed out that the plan required the company stock investment.
According to Evans, the plan’s investment committee was the only defendant that acted as a fiduciary in the decision to include Coca-Cola stock as an investment option. The court rejected employee Elaine Pedraza’s argument that the investment committee should have disregarded the plan’s provisions and halted investing in Coca-Cola stock
“The drastic action Plaintiff advocates would only be appropriate in the case of a company on the brink of collapse, where employee participants in the plan have no further incentive to participate,” Evans wrote. “As Defendants have pointed out, Coca-Cola was a financially robust company with substantial net revenues throughout the Class Period.”
However, Evans refused to throw out claims that Coca-Cola and the other defendants breached their fiduciary duties by incorporating in the summary plan description (SPD) filings with the Securities and Exchange Commission (SEC) that allegedly contained misleading information. Evans demanded that lawyers for Pedraza, who filed the class action suit, submit new legal papers that include more specifics regarding how incorporation of the SEC filings in the SPD was allegedly misleading.
The class was made up of employees who invested in the company’s stock through the plan between May 1997 and April 2005. The plan contained an ESOP component and a choice-of-investment component.
Pedraza alleged that Coca-Cola, its top officers, and the plan’s investment and administrative committees breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by:
- offering only Coca-Cola stock in the ESOP component of the plan,
- including Coca-Cola stock in the choice-of-investment component of the plan,
- allowing the plan to hold Coca-Cola stock, and
- restricting the ability to diversify out of Coca-Cola stock in the ESOP component of the plan.
Pedraza also charged that the defendants breached their ERISA fiduciary duties by failing to inform plan participants of certain non-public business information, such as certain company business practices, which might have affected the participants’ decisions to purchase or keep Coca-Cola stock.
Also, Evans rejected the presumption of some federal courts that an employee stock ownership plan’s investment in employer stock is “prudent” unless a plaintiff can show that a fiduciary abused its discretion in failing to choose a different investment in a particular situation – a standard set by a 1995 case.
“Further, the presumption/abuse of discretion formula it establishes is too broad if it is applied outside the situation where the employer is on the brink of collapse and the employees are not able to sell their stock in the plan,” Evans wrote. “If any combination of factors potentially can overcome (the case law’s) presumption, ERISA fiduciaries are left with no meaningful guidance as to when they should, or should not, ignore an ERISA plan’s requirement to offer company stock . A fiduciary who decides to scrap the ESOP is just as apt to be sued as he would be if he enforced the plan provisions. This uncertainty fosters expensive, speculative litigation. It could also cause employers to be hesitant to offer the benefits of an ESOP to its employees.”
The case is Pedraza v. Coca-Cola Co., N.D. Ga., No. 1:05-cv-1256-ODE, 9/29/06.