Key Supreme Court Ruling Concerning ERISA “Stock Drop” Class Actions: Court Erects Substantial Hurdles to “Stock Drop” Class Actions But Rejects Lower Court Rulings That Investing ERISA Retirement Funds in Employer Stock Is Presumed to be Prudent

Sullivan & Cromwell LLP - June 26, 2014

On June 25, 2014, in Fifth Third Bancorp et al., Petitioners v. John Dudenhoeffer et al., the U.S. Supreme Court issued an important opinion concerning so-called ERISA “stock drop” class actions, wherein participants in an ERISA retirement plan sue the plan’s fiduciaries for investing plan assets in employer stock that later suffers a decline in share price.  Although the Supreme Court rejected lower court holdings that a fiduciary’s decision to invest in employer stock is “presumptively prudent,” the Supreme Court laid down new rules that will make ERISA “stock drop” actions difficult to maintain: (1) fiduciaries facing negative public news about the employer are entitled as a matter of law to rely on the integrity of the employer’s share price in purchasing employer stock; and (2) fiduciaries are not allowed to use inside information about the employer to cause the plan to sell employer stock, and are entitled to consider whether refraining from buying additional employer stock or publicly disclosing negative inside information would do more harm than good to the fund.