The R.J. Reynolds defendants have again prevailed against allegations that they breached their fiduciary duties by divesting the RJR 401(k) plan of funds invested in Nabisco stock. Following remand by the Fourth Circuit, the district court held that a hypothetical fiduciary “would” have divested the plan of the Nabisco investments in the same time and manner as defendants.
In March 1999, RJR Nabisco spun off its tobacco business (RJR) from its food business (Nabisco), the primary purpose of which was to reduce the negative impact that tobacco litigation (and being affiliated with the industry in general) was having on RJR Nabisco’s stock price. In conjunction with this transaction, the RJR Nabisco 401(k) plan spun-off its RJR-related assets and liabilities into a new RJR 401(k) plan. The resulting plan contained three non-diversified stock funds: two funds that invested in Nabisco stock, which were frozen to new investments, and one that invested in RJR stock.
It was subsequently determined that continued exposure to funds invested in Nabisco stock would be imprudent, and a decision was made to divest the RJR 401(k) plan of Nabisco investments. After the divestment was complete, Nabisco’s stock price increased.
A group of participants subsequently filed a class action suit claiming that the RJR 401(k) plan fiduciaries breached their fiduciary duty of procedural prudence by failing to properly investigate the decision to divest the Nabisco stock investments. Following a bench trial, the district found held that even though defendants breached their procedural duty of prudence, their decision to divest the RJR 401(k) plan of Nabisco investments was substantively prudent because a reasonable and prudent fiduciary “could” have undertaken the same action.
As we previously reported here, a divided panel of the Fourth Circuit reversed, holding that a plan fiduciary found to have breached its duty of procedural prudence may escape liability only if it proves by a preponderance of the evidence that an objectively prudent fiduciary “would” – not just that it “could” – have undertaken the same fiduciary action.
On remand from the Fourth Circuit, the district court again entered judgment in favor of the RJR 401(k) plan fiduciaries, and concluded that a reasonable and prudent fiduciary “would” have divested the plan of the Nabisco investments. Crediting defendants’ expert, the court found that an objectively prudent fiduciary would have divested the plan of the Nabisco investments because the RJR 401(k) plan “included three single-stock funds, each of which is approximately four times as risky as a diversified portfolio of mutual funds, [and] two of which were non-employer single-stock funds,” and because of the “considerable” litigation and bankruptcy risk resulting from the pending class action. The court discounted the relevance of favorable analyst recommendations as reflecting “[o]ptimism bias” in the general market, and as belied by the stock’s poor performance. Finally, the court found that the six-month timeline for divestment, “while arrived at without investigation or research,” was objectively reasonable because it allowed the plan to notify affected employees and provide them an opportunity to reallocate their investments.
The case is Tatum v. R.J. Reynolds Tobacco Co., No. 1:02-cv-00373, 2016 WL 660902 (M.D.N.C. Feb. 18, 2016).