A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Northern District of California calls into question actions taken by pension plan fiduciaries during and after the 2017 merger of Dow Chemical Co. and E.I. du Pont de Nemours and Co.
As noted in the complaint, with this merger, the combined entity, known as DowDuPont, became the largest chemical conglomerate in the world. According to the plaintiff, the two historical companies had intended and planned from the beginning to separate into three wholly independent companies and move the DuPont Pension and Retirement Plan to one of the newly formed companies, known as Corteva Agriscience.
“Barely a year later, more details on the plan were finally released when, on November 1, 2018, Ed Breen, CEO of DowDuPont, announced that the pension plan, along with Historical DuPont, were moving to a company with the trade name Corteva Agriscience, a spinoff purely focused on agriculture,” the complaint says. “The existence of Historical DuPont, the plan’s sponsor for more than a century and the company for whom the plan participants worked, would be mostly nominal, as all of the assets and business lines of that company other than its agricultural businesses would stay with the New DuPont or the New Dow, while all of its pension liabilities, along with tremendous litigation liabilities, would transfer.”
To be clear, after the 2017 combination of the companies and the creation of Corteva, the leadership announced plans to again separate Dow and DuPont. According to the complaint, retirees were told by Breen to take comfort in the fact that Corteva was going to be highly rated and that a recent contribution of $1.1 billion had been made to top up the plan, which, at the time, was still short of being fully funded by several billion dollars.
“In fact, the shortfall was more than $3.2 billion at the end of 2018 when using the artificially inflated interest rates amended into ERISA by MAP-21 and more than $5.9 billion at the end of 2018 using unadjusted, traditional ERISA rates,” the complaint states.
The complaint suggests that the use of artificially high interest rates to calculate statutory segment rates decreases the funding shortfall that a plan is required to disclose to participants annually. At the same time, these inflated interest rates decrease the minimum amount a plan sponsor is required to contribute each year, the complaint alleges.
“Understated liabilities and reduced contributions are a double whammy. Not only are the plan’s liabilities understated, but, because liabilities are directly linked with funding requirements, less cash is being invested to cover future benefits,” the complaint states. “Should Corteva suffer any downturns in its business, retirees are at risk. More importantly, Historical DuPont, the steward of the plan since its formal adoption on September 1, 1904, is no longer a functioning business capable of meeting its funding obligations under the plan. Instead, it is a wholly owned subsidiary of Corteva, to whom the plan participants must now turn for their promised benefits.”
Seeking class-action status, the lead plaintiff suggests that plan fiduciaries “are kicking the plan down the road along with the retirees that built the historical company.”
“The new companies, by leaving Historical DuPont as the plan sponsor and moving that company, after having eviscerated the plan sponsor’s business operations, to Corteva, have removed themselves from the controlled group of the plan,” the complaint states. “In summary, were Corteva to fail and file for bankruptcy, the plan can be terminated through a distress proceeding without affecting the other companies. If the other companies had not removed the plan from their controlled group, the plan could not be terminated through a bankruptcy filing unless all members of the controlled group also filed for bankruptcy.”
The plaintiff says these actions were taken in violation of ERISA and in violation of the fiduciary duties owed to retirees.
“Dow, DuPont, plan sponsor and certain individual officers and directors have, among other violations, acted disloyally and engaged in prohibited transactions by putting their own financial interests in front of retiree earned benefits,” the compliant states. ”These individuals and entities are motivated by self-interest and have fatal conflicts of interest that prevent them from making appropriate impartial decisions about the future of more than 120,000 retirees and their families.”
The complaint seeks permanent injunctive relief, declaratory planwide relief, make-whole relief for alleged losses, and disgorgement of ill-gotten profits against the defendants. Apart from the alleged fiduciary breaches and prohibited transactions detailed in the lengthy complaint, the allegations also include that plan officials have repeatedly violated plan documents.
“The plan documents do not contemplate, nor do they authorize, the evisceration of the business activities of Historical DuPont and the shift of the plan sponsor, along with the plan assets and liabilities, to a newly created company and controlled group,” the complaint argues. “By removing Historical DuPont’s business activities, leaving it a shell corporation, Historical DuPont is no longer able to make the contributions that the plan documents require be made by the plan sponsor, Historical Dupont. Both actions are violations of the plan documents.”
The DuPont Corporate Communications team shared the following statement concerning the lawsuit: “On Wednesday, July 3rd, a class action lawsuit was filed in U.S. District Court in the Northern District of California involving the Pension and Retirement Plan. The plaintiffs in the purported class are alleging that the fiduciaries of the Pension and Retirement Plan violated the Employee Retirement Income Security Act of 1974, as amended, when they directed that E.I. du Pont de Nemours and Company (the Pension and Retirement Plan sponsor), along with the Pension and Retirement Plan itself, would be included in the assets that were recently spun off with Corteva, Inc. We believe that the allegations in the complaint are without merit, we have strong defenses and we intend to defend the allegations vigorously.”
The full text of the complaint is available here.