Would’ve, Could’ve, Should’ve

August 29, 2014

Authored by: benefitsbclp

Tatum v. RJR Nabisco Investment Committee, decided by the Fourth Circuit on August 4, involved the divestiture of the Nabisco stock funds following spin off of Nabisco.  Some 14 years after Nabisco and RJ Reynolds merged to form RJR Nabisco, the merged company decided to separate the food and tobacco businesses by spinning off the tobacco  business.  Following the spinoff, the RJR 401(k) plan, which was formed after the spinoff, provided for the Nabisco stock funds as frozen funds, which permitted participants to sell, but not purchase, Nabisco stock.

Although the Plan document provided for the Nabisco stock funds, RJR decided to eliminate the funds approximately 6 months following the spinoff.  The decision was made by a “working group” of several corporate employees and not by either of the fiduciary committees appointed to administer the Plan and review its investments.

During the 6 months following the spinoff, the price of the Nabisco stock declined significantly.  However, the stock was rated positively during this period by analysts who recommended a “hold” or a “buy” for the stock during 1999 and 2000.

After the Nabisco stock funds were divested in January 2000, the price for the Nabisco stock began to rebound.  In December 2000, following a bidding war, Nabisco was sold for a price well in excess of the price that the stock was sold by the Plan in January.  In 2002, this litigation commenced.

District Court Decision.  The District Court found that RJR had breached its fiduciary duty because the “working group” that recommended the divestiture of the Nabisco stock funds did no investigation of the merits of maintaining or divesting the stock funds.  Although the District Court found a fiduciary breach, it dismissed the case because the decision to divest the Nabisco stock fund was objectively prudent:  a reasonable and prudent fiduciary could have made the same decision after a proper investigation.

Appellate Court Decision.  On appeal, the Fourth Circuit, in a two to one decision, agreed that RJR had breached its duty of procedural prudence.  Two judges concluded that the proper standard for determining objective prudence is whether a prudent fiduciary would have, not could have, made the same decision. The majority concluded that the “could have” standard adopted by the District Court sets too low a bar for a breaching fiduciary.  According to the majority a “could have” standard describes what is “merely possible while a “would have” standard describes what is “probable.”

The dissent agreed that RJR had not been procedurally prudent but sharply disagreed with the majority’s standard for objective prudence.  The dissenting opinion stated that objective prudence does not “dictate one and only one investment decision.”  ERISA allows for more than one prudent decision when all of the facts existing at time the decision is made are considered.  The dissent implied that the majority may have applied hindsight in reaching its conclusion.   It characterized the takeover attempt and bidding

war in late 2000 as unexpected.

The majority vacated the District Court’s decision and remanded with instructions to review the evidence and determine whether RJR met its burden of proving that a prudent fiduciary would have made the same decision:  to divest the Nabisco stock funds in January 2000.


Lessons Learned.  The majority and dissent’s sharply conflicting views regarding the standard for whether a fiduciary decision is objectively prudent provide great material for theoretical discussion among lawyers.  Plan fiduciaries should assure, however, that they never become part of the debate.  Had the RJR fiduciaries simply (i) performed a thorough investigation of the alternatives, (ii) made a reasoned decision based on their investigation, and (iii) documented the basis for their decision, no breach of duty would have occurred in the first place even though, with hindsight, the decision may have been different.