The 5th U.S. Circuit Court of
Appeals has ruled that a district court erred in finding that
participants in BP’s employee stock ownership plan (ESOP) plausibly
stated a claim that BP breached its fiduciary duties under heightened
company stock case pleading standards established by the U.S. Supreme
Court in Fifth Third v. Dudenhoeffer.
The lawsuit was
filed in 2010 after BP shares dropped following the Deepwater Horizon
offshore drilling rig explosion. In its first ruling, the U.S. District
Court for the Southern District of Texas applied the then-prevailing Moench v. Robertson presumption of prudence for ESOP fiduciaries offering company stock as a plan investment.
However, while an appeal of this decision was pending. The U.S. Supreme Court ruled in Fifth Third that
ESOP fiduciaries did not have a presumption of prudence. In addition it
set the following pleading standard: “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.” The appellate court revived the lawsuit based on the Supreme Court’s ruling.
The 5th Circuit noted that on remand to the district court, the plaintiffs moved to file an amended complaint alleging, as per Fifth Third,
that the fiduciaries possessed unfavorable inside information about BP
and that they could have taken various alternative actions that would
not have done more harm than good to the BP stock fund. The district
court held that the stockholders had plausibly alleged that the
defendants had inside information; and the stockholders had plausibly
alleged two alternative actions that the defendants could have taken
that met the Fifth Third standard: freezing, limiting, or restricting company stock purchases; and disclosing unfavorable information to the public.
the appellate court pointed out that “Aside from these conclusory
statements, the stockholders do not specifically allege, for each
proposed alternative, that a prudent fiduciary could not have concluded
that the alternative would do more harm than good, nor do they offer
facts that would support such an allegation. This runs counter to the
Supreme Court’s directive that ‘the facts and allegations supporting’ an
alternative action that could satisfy Fifth Third’s standards ‘should
appear in the stockholders’ complaint.’”
The appellate court
added that the amended complaint states that BP’s stock was overvalued
prior to the Deepwater Horizon explosion due to “numerous undisclosed
safety breaches” known only to insiders. Based on this fact alone, the
court said, it does not seem reasonable to say that a prudent fiduciary
at that time could not have concluded that disclosure of such
information to the public or freezing trades of BP stock—both of which
would likely lower the stock price—would do more harm than good. “In
fact, it seems that a prudent fiduciary could very easily conclude that
such actions would do more harm than good,” the court concluded.
5th Circuit reversed the district court’s decision and remanded the
case back to the lower court for further proceedings. Its opinion in Whitley v. BP, P.L.C. is here.