Playing Hot Potato With Employer Stock
This is an interesting piece on one of the most loaded issues in ERISA litigation, namely the potential personal liability of corporate officers who run a company’s benefit plans, in particular their defined contribution plans, such as 401(k)s or ESOPs. The article drives home the fact that when CFOs or other officers are named as the fiduciaries, as is often the case with company plans, they are thereby opened up to liability for any problems in the operation of the plans that can be characterized as breaches of fiduciary duty. Importantly, however, and on a topic that the article skips over (it’s a short article, and a point likely deliberately beyond its scope), corporate officers who get intimately involved with the operations of such plans are likely to be targeted as fiduciaries in litigation, and may well be found to be fiduciaries, even if the plan at issue avoids naming them as fiduciaries; their involvement is bound to render them so-called deemed or functional fiduciaries, which opens them up to much the same liability risk.
The article focuses on the problems for those corporate officers, and in particular CFOs, that stem from holding employer stock in plans, which are acute as a result of the inherent conflict between the business needs of the company with regard to its publicly traded stock and the potentially distinct risks to plan participants of financial loss from holding that stock in a plan. When problems with a stock arise, a corporate officer’s actions in response in one direction may benefit one side of that equation at the expense of the other, at the same time that different actions by that same officer could reverse that calculus. When the resolution of that problem results in losses to the company stock held by the plan or its participants, the fiduciaries enter the cross-hairs for litigation and potential resulting liability based on the possibility they have breached their fiduciary duties to the plan participants by those actions.
The article poses as one solution the creation of a data driven system that preordains decision making with regard to company stock holdings, based on such issues as changes in stock price, etc., thereby taking the day in, day out discretion over what to do with the stock holdings out of the hands of the fiduciaries. There are many benefits to such an approach when it comes to defending possible breach of fiduciary duty claims down the road involving those stock holdings, but it is far from a get out of jail free card. At a minimum, the corporate officers who have been serving as plan fiduciaries, whether in name or by operation of law, are likely to be accused of having breached their fiduciary duties by erring in creating, selecting and putting the automatic system into place in the first place, and by failing to monitor or adjust the system along the way in response to any changing dynamics in the marketplace. As the Seventh Circuit’s decision this month in Kraft Foods reflects, there is no doubt that good class action lawyers and good financial experts can identify and target financial anomalies in any system designed to process employer stock holdings, and they will do that with this approach as well. It doesn’t mean the author’s proposal doesn’t have merit, and I can see many ways in which it would strongly aid in the defense of a breach of fiduciary duty claim against corporate officers.
However, it doesn’t change the fact that the best approach to the defense of such corporate officers is either to keep employer stock out of the plan itself or, in a move court tested and approved by at least one circuit, move the entire management and decision making on whether to hold company stock or not, and if so when to buy and sell it, out of the company and onto very qualified outside advisors. This will still, just like the case as noted above with regard to the author’s proposal for creating an automated system, not completely exempt the corporate officers who are fiduciaries from the risk of liability, but will make it very, very hard to recover from them; they can still be sued for alleged errors in selecting and then failing to monitor that outside advisor, but if the outside experts are well-chosen, that’s going to be a hard row to hoe to recover from them.