The National Center for Employee Ownership has completed an analysis of ESOP and 401(k) plan company stock litigation over the last 20 years, and says its analysis shows that over the last 20 years, courts have generally given the presence of company stock in 401(k) plans a presumption of prudence, and have almost always done the same with Employee Stock Ownership Plans (ESOPs). The NCEO cautions, however, that the courts have sided with plaintiffs in granting standing to former participants.
The NCEO’s review categorizes all the key decisions made in the cases according to the kind of decision made (standing, disclosure, valuation, the presumption of prudence, who is a fiduciary, and many other issues), provides a citation, and, in the ESOP cases, a brief description of the ruling.
While the NCEO notes that most of the ESOP decisions are not as easily analyzed in terms of which legal doctrine was upheld, they have put together a summary of the ESOP cases during this period, noting that “because many cases had decisions made by one or more courts on more than a single issue, the total number of decisions is much greater than the total number of cases filed (175)”.
Where a company has been sued on similar issues by different plaintiffs, the NCEO counted that as a single case. In some instances, the plaintiffs’ names changed as the class was redefined. In others, the company’s trustee was sued separately, or different people filed separate claims against the company for similar issues.
According to NCEO executive director and cofounder notes that it is striking that over 20 years, “there have been only 141 private company ESOP cases, not counting a handful we did not include because they deal with issues tangential to current plans. The history makes it very clear that companies that hire qualified professionals, follow good plan practices, and are not using the ESOP for purposes the law did not intend are extremely unlikely to be sued, much less lose, in court”.
The NCEO report notes that most of the decisions reported here were at the pleading stages, that relatively few cases have actually ended up being decided at trial, as opposed to settled out of court, and many others are still in process. “Because there are so many cross-cutting issues in these cases, it is generally not practical to give a simple statistical summary of what ultimately was decided in each case.” In summarizing decisions, NCEO said is has ignored lower court rulings when an appeals court ruled on the same subject, whether to accept or reverse, though it made an exception is where a case was remanded to a lower court and the lower court reached a conclusion on a matter of law of some significance.
On the 401(k) front, the NCEO says it tracked dozens of cases, almost all in public companies. “Most notably, we found that in 25 of the 37 cases, courts largely followed the Moench doctrine that presumes holding employer stock in a plan is prudent. Sixteen of 24 cases granted standing to former participants,” according to the NCEO.
A table summarizing the findings is on the next page. For information on how to obtain the full review, ESOP and 401(k) Plan Employer Stock Litigation Review: 1990-2010, go to http://www.nceo.org/main/pub.php/id/258/.
Summary of ESOP Decisions 1990-2010
# of Cases
What Was Decided
Claims Against Providers
6 of 7 allowed claims to proceed under state law
Deferral of Gains on Sale to ESOP
Disclosure to Participants
Most cases on deductibility of distributions as a 404(k) dividend, almost always concluding they are not.
Employment Rights and Plan Eligibility Issues
ESOPs as Takeover Defense
Lenders as Fiduciaries
Management of Plan Assets Other than Stock Drop Cases
Management of Plan Assets, Stock Drop Cases
Presumption of prudence almost invariably upheld, but with occasional reservations
Parties in Interest Definition
Securities Law Issues Other than Disclosure
Where the issue was whether former employees retained standing, generally died with employees
State Law Claims
Voting, Tendering Rights, and ESOP Governance Rights
Who Is a Fiduciary?
Total Private Company ESOP Cases, 1990-2010
Total Public Company ESOP Cases, 1990-2010