Zien Halwani

Document Type

Research Memorandum

Publication Date




Employee stock ownership plans (ESOPs) are a form of statutory pension program designed to invest employee retirement assets in the stock of the employer. Under the Employment Retirement and Income Securities Act of 1974 (“ERISA”), ESOP fiduciaries must discharge their duties “with the care, skill, prudence and diligence under the circumstances prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This is to say that under ERISA, ESOP fiduciaries are liable for breaches of duty of care, unlike most corporate fiduciaries that are relieved from such liabilities by state exculpation statutes.

Before the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer, this duty of care was applied with an “abuse of discretion” standard by some of the United States Courts of Appeals. For example, in Moench v. Robertson, the Third Circuit explained that (1) ESOPs are consistent with the formulation of a trust because they are formulated with the primary purpose of investing in employer securities and (2) “[w]here discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion.” (emphasis added).

In Fifth Third, the Supreme Court changed this abuse of discretion standard to the “stricter” “prudent person” standard applied to all ESOP fiduciaries under 29 U.S.C. § 1104. But while Fifth Third seemed to create a heavier burden for ESOP fiduciaries, the devil was in the details. The Supreme Court also announced that, in the case of publicly traded stock, absent “special circumstances,” the “prudent person” standard would not require an ESOP to recognize from publicly available information alone that the market is over- or undervaluing that stock. Thus, after Fifth Third, plaintiffs were left with two options in ESOP breach of duty of care claims: (1) allege a breach based on public information and be forced to plead a “special circumstance” affecting market price reliability and/or (2) allege a breach based on nonpublic information but (a) show an alternative action that could have been taken in compliance with securities laws and (b) show that a prudent fiduciary in the same circumstances would not have viewed this action as more likely to harm the fund than to help it.



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