Mixed Ruling in Wawa Stock-Drop Complaint Partial Dismissal
Judge Paul S. Diamond of the U.S. District Court for the Eastern District of Pennsylvania has moved forward several complaints in a suit alleging terminated employee stock ownership plan (ESOP) participants’ were forced to liquidate company stock holdings at an unfair price.
Plaintiffs Greg Pfeifer and Andrew Dorley, on behalf of a putative class of terminated Wawa employees, allege that Wawa Inc., its ESOP trustees, and its plan administrators violated the Employee Retirement Income Security Act (ERISA) by amending the plan to eliminate plaintiffs’ right to own Wawa stock, forcing liquidation of plaintiffs’ Wawa stock at an unfair price, and misrepresenting plaintiffs’ rights under the plan.
Before the challenged amendment, the plan provided terminated employee participants (including plaintiffs) the same benefits as participants who retired from Wawa at their designated retirement date. Participants holding more than $5,000 in their plan accounts could receive their benefits in either a single lump-sum payment or in installment payments over ten years. The plan also provided both terminated and retired employees with a put option (which they could execute before age 68) to sell their shares back to Wawa at an appraised price.
In August 2015, however, defendants amended the plan to divest terminated employees—but not retired employees—of their shares in Wawa stock. On September 11, 2015, defendants effectuated the forced sale at $6,940 per share (below fair market value) and charged a distribution fee. According to the complaint, the price of Wawa shares has increased since the September 2015 forced sale, and reached $7,652 per share on December 30, 2015.
NEXT: Anti-cutback claims and improper plan amendment
Plaintiffs alleged that the plan amendment violated ERISA’s anti-cutback provision. But, Diamond noted in his opinion that the U.S. Treasury has determined that the “right to a particular form of investment (e.g., investment in employer stock or securities)” is not a protected benefit under the IRC anti-cutback provision. “Plaintiffs offer no good reason for me to reject this interpretation. Accordingly, Defendants did not violate the anti-cutback rule by eliminating Plaintiffs’ rights to own Wawa shares through the Plan,” he wrote.
However, Diamond said the allegation that defendants unlawfully liquidated plaintiffs’ accounts and forced their transfer “is quite another matter,” noting that distributions are allowed without account holder’s consent only when the account contains less than $5,000. He rejected Wawa defendants’ motion to dismiss this claim.
The plaintiffs allege that their ownership of Wawa shares must be reinstated because the terms of the plan, including the right to hold Wawa shares through age 68, became fixed when plaintiffs completed performance in 2009, restricting defendants’ ability to amend the plan. Accordingly, “when a participant leaves the employ of the company, the trustee is ‘required to determine benefits in accordance with the plan then in effect,’” and any subsequent amendment that diminishes a participant’s benefits is ineffective. The plan in effect when plaintiffs completed performance in 2009 granted them a valuable option to hold or sell Wawa stock and the plan amendment deprived plaintiffs of that value. Diamond found that Wawa’s reservation of a right to amend the plan “at any time” did not necessarily give it the authority to reduce plaintiffs’ benefits under the plan after plaintiffs completed performance. “At a minimum, the Plan is ambiguous as to whether Wawa could amend the Plan ‘after the participants’ performance.’ Accordingly, I will deny Defendants’ Motion to Dismiss Count VI,” he wrote.
NEXT: Misrepresentations in SPDs and unfair share price
Diamond also found that the plaintiffs plausibly alleged that the defendants made two misrepresentations in the summary plan descriptions (SPDs): “[N]o amendment to the Plan will reduce the benefit you have already earned, or divest you of any entitlement to a benefit;” and terminated employees would be paid their vested benefits “in the same form and manner as retirement benefits.”
The plaintiffs contend in part that defendants improperly failed to disclose that the plan amendment was intended to restore the Wood family’s majority ownership of Wawa. But, Diamond noted that to state a claim for breach of fiduciary duty by omission, the plaintiffs must show that “the misrepresentation or inadequate disclosure was material”—that it would “mislead a reasonable employee in making an adequately informed retirement decision, or a decision regarding his benefits under the ERISA plan.” He concluded that plaintiffs have not alleged how defendants’ failure to disclose the motivation underlying the plan amendment affected their retirement planning in any way, nor have they offered authority permitting a misrepresentation claim to proceed in remotely comparable circumstances, so he dismissed this claim.
Diamond disagreed with defendants move to dismiss claims regarding unfair share price. As pled, in 2014, defendants’ financial adviser, Duff & Phelps, valued Wawa stock at $7,000 to $7,900 per share, above the forced sale price of $6,940, even though it did not include the anticipated tax benefits from Wawa’s 2014 reorganization. Defendants offered outside shareholders and dissenters $7,000 per share as part of the reorganization, also above the forced sale price. Defendants purportedly charged an unjustified $50.00 distribution fee. The forced sale price, which was derived from a June 2015 appraisal, was stale by the time the forced sale occurred. The share price has continued to rise since the sale. “These allegations are sufficient to make out plausible claims that Plaintiffs did not receive adequate consideration for their stock. Accordingly, I will deny Defendants’ Motion to Dismiss these claims,” Diamond wrote.