Fifth Third Standard Applies to Closely Held Company Stock Suits

A district court judge said her reading of the U.S. Supreme Court's decision in Fifth Thirdv. Dudenhoeffer does not preclude application of the "alternative action" standard to closely held companies.

Participants in the Hill Brother Construction Company, Inc. Employee Stock Ownership and 401(k) Plan and Trust (ESOP) failed to state a claim under the requirements of Fifth Third v. Dudenhoeffer that plan fiduciaries breached their duties by continuing to offer company stock in the plan, a court found.

U.S. District Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi, noted that in the U.S. Supreme Court decision in Fifth Third, the high court said to “state a claim for breach of the duty of prudence on the basis of 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 to help it.”

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The plaintiffs in Hill v. Hill Brothers Construction Company, Inc. argued that because the business in Fifth Third was a publicly traded corporation, the same considerations and standards do not apply in their case, as Hills Brothers Construction (HBC) was a closely held corporation. In particular, the plaintiffs contend that the claim in Fifth Third was based on inside information that is not at issue here, and publicly traded corporations are subject to securities laws whereas non-public entities are not. Therefore, they assert there is no specific requirement to plead an ‘alternative action.’

However, in her opinion, Aycock said her reading of Fifth Third does not preclude application of the “alternative action” standard to closely held companies. In the Hill case, inside information is alleged to form the basis of the plaintiffs’ breach of the fiduciary duty of prudence, and Aycock found no securities law infringements are at issue or need to be balanced.

NEXT: Even if Fifth Third wasn’t applicable

Aycock concluded that the plaintiffs failed to allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.

She noted that even if the court did not find the Fifth Third standard to be applicable, the plaintiffs failed to state a claim pursuant to Iqbal and Twombly. The Supreme court in Twombly said, “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal used this standard.

Aycock noted that this means, although a complaint need not include detailed factual allegations, it must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’ And, that is what Aycock found the plaintiffs in Hill offered.

The case arose because in October of 2012, the plan participants received official written notice that the value of their retirement investment was approximately $19.8 million. HBC was valued by an outside evaluator at $16 million in early 2013. Within six months, however, HBC had ceased operations. On June 18, 2013, HBC employees were notified that their retirement savings amounted to zero.

The District Court’s opinion in the case is here.

PBGC Hopes to Introduce Late Premium Penalty Reductions

The Pension Benefit Guaranty Corporation is proposing to cut penalties for late payment of premiums in an effort to reduce costs and make it easier for plan sponsors to maintain traditional pension plans.

The Pension Benefit Guaranty Corporation (PBGC) is proposing to cut its penalties for late premium payments amid increasing criticism that the cost of its mandatory insurance coverage stands among the chief causes driving private employers out of the defined benefit pension market.

“We think penalties should be no more than necessary to encourage timely payments,” explains PBGC Director Tom Reeder. “I’m committed to doing everything I can to help companies keep their pension plans.”

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Under current laws and regulations, PBGC uses a two-tiered penalty structure that rewards self-correction. A lower rate of 1% of the late payment per month late applies when a delinquency is corrected before PBGC notifies the sponsor, while a higher rate of 5% applies if the correction is made following PBGC notification. Penalties in the first category are capped at 50% of the late amount, and 100% in the second instance, PBGC explains.

Under a new proposed rule released this week, PBGC would essentially reduce penalties for late payers by half. Additionally, for sponsors with “good payment histories that pay promptly following notification of late payment,” PBGC will reduce the penalty by 80%. The proposed changes will apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later. (A premium rate summary is available here.)

In an example case shared by PBGC in which a $100,000 premium is paid two months late by a plan sponsor who discovered the underpayment and corrected it before PBGC sent notice, the current regulations would lead to a $2,000 penalty. Under the proposed regulation, the penalty in this situation would be half that amount, or $1,000.

If the same plan sponsor did not discover the missed premium payments before PBGC sent notice, currently the payment would amount to $10,000 penalty, or 5% of $100,000 for two months. Under the proposed regulation, PBGC would therefore assess a $5,000 penalty. In addition, if the sponsor qualified for the good payment history waiver, PBGC would automatically waive 80% of that amount, reducing the penalty from $5,000 to $1,000—the amount that would have been assessed due if the plan had self-corrected. 

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