A federal district court in Georgia held that plan fiduciaries of a closely-held company’s single stock ERISA fund may have a duty to disclose material, non-public information concerning the value of the company’s shares when the information could have a potentially extreme negative effect on a plan participant.  The plaintiffs were participants in defendant Stiefel Laboratories, Inc.’s  (SLI’s) defined contribution stock plan.  The plan terms permitted plaintiffs, under certain circumstances, to require SLI to purchase their shares at the price set forth in the most recent stock appraisal.  Plaintiffs alleged that SLI encouraged them to sell their shares in SLI’s single stock ERISA fund for one-fifth of the amount they would have received as part of GlaxoSmithKline’s subsequent purchase of SLI.  Plaintiffs argued that SLI and the plan fiduciaries had a fiduciary duty to disclose the impending acquisition, and that had they been so informed, they would not have exercised their rights to put the shares to SLI.

The court denied defendants’ motion for summary judgment on plaintiffs’ nondisclosure claim.  In so ruling, the court relied on earlier decisions recognizing an affirmative duty to disclose under “special circumstances with a potentially extreme impact on a plan as a whole, or where participants generally could be materially and negatively affected.”  The court distinguished recent Eleventh Circuit authority that plan fiduciaries do not have a duty to disclose material, nonpublic information to plan participants as being limited to publicly traded stock where the value is set in the open market and where a contrary rule would conflict with prohibitions on insider trading.  According to the court, it was up to the factfinder to decide whether SLI’s “plans of going public” constituted “special circumstances” requiring disclosure.  Central to the court’s decision was the fact that the plan participant was “in a vulnerable position” because he did not receive any warning that “investment in a non-diversified single stock fund was risky” and because he did not “have the benefit of the open market determining the value of his SLI stock.” Under these circumstances, the plan participant “did not receive the slightest hint that his shares would not be purchased at a fair market value.”  To the contrary, the court pointed to evidence that the defendants communicated false information to him regarding the actual value of SLI stock and management’s plans about the future of the company, either of which the court held could have been actionable as affirmative misrepresentations.  The case is Wagner v. Stiefel Laboratories, Inc., No. 12 Civ. 3234, 2015 U.S. Dist. LEXIS 81464 (N.D. Ga. June 18, 2014).

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Photo of Neil V. Shah Neil V. Shah

Neil V. Shah is a member of the Employee Benefits & Executive Compensation Group, where he focuses on ERISA litigation.

He is the lead attorney representing the firm’s Taft-Hartley plan clients in withdrawal liability and delinquent contributions matters.  As part of his practice…

Neil V. Shah is a member of the Employee Benefits & Executive Compensation Group, where he focuses on ERISA litigation.

He is the lead attorney representing the firm’s Taft-Hartley plan clients in withdrawal liability and delinquent contributions matters.  As part of his practice, Neil pursues employers, their owners and officers, and affiliated companies to collect the amounts owed to these plans using a variety of complex legal theories, and has secured several precedential opinions and multi-million-dollar judgments in their favor.  Neil also defends these plans in arbitrations challenging the methods and assumptions used to calculate withdrawal liability, which has yielded a number of notable arbitration decisions and court opinions.  Owing to his experience in this area, Neil is a co-editor of the withdrawal liability chapter of the premier employee benefits treatise, Employee Benefits Law, published by Bloomberg, and regularly presents on the topic before practitioners and consultants that work in the area, such as at meetings of the Conference of Consulting Actuaries and the Employee Benefits Section of ABA’s Section of Labor & Employment Law.

In addition to his Taft-Hartley plan experience, Neil has represented several plan sponsors and fiduciaries in ERISA class actions alleging that the plan’s investments or other practices are imprudent, such as excessive fee and stock drop cases.

Prior to joining Proskauer, Neil was an associate at a large regional firm, where he litigated individual and class actions involving challenges to insurer claims adjudication procedures under ERISA, fraud recoveries against healthcare providers, and claims for benefits.

Neil has authored several articles, including those published in the New Jersey Law Journal and Bloomberg National Affairs.  He is also a frequent contributor to Proskauer’s Employee Benefits & Executive Compensation Blog.