Process Trumps Perfection

There appears to be good news coming out of the 6th Circuit for company-funded employee ownership plans (ESOPs) and their fiduciaries.    The case dates back to 2009 and spans several decisions and important events, including the Supreme Court’s recent decision in Dudenhoeffer v. Fifth Third Bank.

On November 10, 2016, the US Court of Appeals for the 6th Circuit held in Pfeil v. State Street Bank and Trust Company that plan fiduciaries did not breach their duty of prudence by continuing to invest in General Motors stock, even as the company faced a serious economic challenges.  State Street held its investments in GM stock following active discussion of the events unfolding at GM during a tumultuous 2008. 

The decision provides guidance, similar to that offered in the process agreement between GreatBanc Trust Company and the Department of Labor, that a fiduciary using diligent review and due diligence processes for evaluating an investment in employer securities satisfies its duty of prudence.  The court held that State Street’s decisions were not imprudent simply because it could have made a different decision and concluded that the rigor of State Street’s investment decision process demonstrated prudence.  The plaintiff brought forth no special circumstances that would have justified relief.

For companies considering adopting and transacting with an ESOP, the selection of experienced advisors is critical, as is maintaining independence and a conflict-free process.  The 6th Circuit decision gives additional comfort that the decisions of a fiduciary showing active engagement and due diligence will not be questioned or overturned simply because another person might have made a different decision.

AUTHOR:   Robert E. Massengill

POSTED IN:   ESOP