October 5, 2016

Fifth Circuit Dismisses ESOP Stock Drop Suit

Holland & Knight Regulatory Litigation Blog
Chelsea Ashbrook McCarthy

On September 26, 2016, the U.S. Court of Appeals for the Fifth Circuit issued its decision in Whitley v. BP, P.L.C.. The Fifth Circuit reversed the lower court's ruling that allowed the plaintiffs' amended complaint to stand. The amended complaint alleged claims against the fiduciaries of an employee stock ownership plan (ESOP) of BP p.l.c., a publicly traded company. The Fifth Circuit held that the amended complaint did not plausibly state a claim against the plan fiduciaries.

Plaintiffs were investors in the BP stock fund, an ESOP comprised primarily of BP stock. In April 2010, the BP-leased Deepwater Horizon offshore drilling rig exploded and an oil spill in the Gulf of Mexico followed. Thereafter, BP's stock price significantly declined in value. Plaintiffs filed suit.

The plaintiffs' first complaint was dismissed when the presumption-of-prudence standard for fiduciaries who invest in company stock (i.e. the "Moench presumption") was still at play. The district court had held that plaintiffs failed to allege facts to overcome the presumption of prudence. Plaintiffs appealed, and while on appeal, the U.S. Supreme Court issued its decision in Fifth Third Bancorp. v. Dudenhoeffer, 134 S. Ct. 2459 (2014).  Dudenhoeffer rejected the Moench presumption and instead held that to state a claim for breach of the duty of prudence based on inside information "a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it." The Fifth Circuit then remanded the BP plaintiffs' claim for reconsideration in light of the Dudenhoeffer standard.

On remand, plaintiffs filed an amended complaint. They alleged that the plan fiduciaries possessed unfavorable inside information and that the fiduciaries could have taken alternative actions that would not have done more harm than good – freezing, limiting or restricting company stock purchases, or disclosing unfavorable information to the public. The district court concluded that these allegations satisfied Dudenhoeffer's standard.

The Fifth Circuit reversed, holding that the plaintiffs did not specifically allege, for each alternative, that a prudent fiduciary could not have concluded that either alternative would do more harm than good. The Fifth Circuit also noted that the plaintiffs failed to allege facts supporting such allegations. In reaching this conclusion, it clarified that the plaintiff "bears the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it."

Whitley v. BP, P.L.C., No. 15-20282, --- F.3d ---- (5th Cir. 2016).

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