On November 6, 2019, the Supreme Court will hear oral argument for Retirement Plans Committee of IBM v. Jander to expand on its “more harm than good” pleading standard articulated in Fifth Third Bancorp v. Dudenhoeffer. Both Dudenhoeffer and Jander deal with employee stock ownership plans (ESOPs), retirement plans which primarily invest in the stock of the company that employs the plan participants. In Dudenhoeffer, the Supreme Court found that Congress has encouraged the use of ESOPs, as demonstrated by certain statutes exempting ESOP fiduciaries from some of the duties imposed upon other ERISA fiduciaries (such as the duty to diversify retirement plans). ERISA permits company executives to serve as ESOP plan administrators, creating a potential conflict of interest because company executives possess insider information as to whether the market has correctly valued the company’s stock.
The Supreme Court recognized the possibility that ESOP plan participants could always bring suit against their fiduciaries in the event the company’s stock price tumbles, and thus heightened the pleading standard for such a claim in Dudenhoeffer. Now, plaintiffs must plausibly allege that ESOP plan fiduciaries in the defendants’ position could not have concluded that an alternative action, such as promptly disclosing the insider information, would do more harm than good to the ESOP. Appellate courts have struggled to implement this standard. In particular, the Second Circuit has diverged from the Fifth and Sixth Circuits by deciding that a plaintiff can satisfy the Dudenhoeffer pleading standard by alleging that plan fiduciaries could not have concluded that promptly disclosing insider information would impose more harm than good because the harm of an inevitable disclosure of an alleged fraud generally increases over time, and therefore prompt disclosure is always the preferable choice.
Companies offering ESOPs should watch closely. Corporate executives will always possess more information than the public markets about their own company, and company stock prices will inevitably decline at some point. Therefore, if the Supreme Court were to agree with the Second Circuit, ESOP fiduciaries could be faced with suits alleging breach of the fiduciary duty of prudence anytime a company’s stock price decreases, a risk which Dudenhoeffer purports to mitigate.