Thursday, November 11, 2010

GreatBanc/Tribune Com. ESOP Decision - Court Finds Prohibited Transaction

The United States District Court for the Northern District of Illinois ruled on November 9, 2010 that GreatBanc Trust Co. breached its fiduciary duties when it approved a massive purchase of unregistered shares of Tribune Co. stock by the media conglomerate's employee stock ownership plan . See Neil v. Zell, N.D. Ill., No. 08 C 6833. In their lawsuit against GreatBanc, the plaintiff plan participants alleged that as the ESOP's trustee, GreatBanc breached its ERISA fiduciary duties by approving the ESOP's purchase of unregistered shares of Tribune because this purchase was a prohibited transaction. In granting partial summary judgment for a class of ESOP participants, the Court determined that the ESOP's purchase from Tribune of nearly 9 million newly issued unregistered shares of Tribune was a prohibited transaction under the ERISA.

By way of background, until 2006, Tribune was a publicly traded company worth billions of dollars. Tribune owned 10 daily newspapers, 25 television stations, more than 50 websites, and the Chicago Cubs baseball team. Tribune's profits began to decline dramatically in 2006 as the media industry shifted to the Internet. To deal with some of its financial turmoil, Tribune began in 2007 to shift ownership of the company to the ESOP. One step of the process in making the ESOP the company's sole shareholder was a purchase by the ESOP on April 1, 2007, of nearly 9 million newly issued unregistered shares of Tribune for $28 per share. In exchange for the shares, the ESOP gave Tribune a promissory note in the amount of $250 million to be paid over 30 years. In addition to being unregistered, the ESOP's Tribune shares were subject to trading limitations. GreatBanc, as the plan's trustee, agreed that the ESOP's shares would be transferable only pursuant to a public offering registered under the Securities Act of 1933, under Rule 144 or 144A of the Securities and Exchange Commission, or some other unspecified, legally available means of transfer. At the time transfer of shares to the ESOP took place, more than 240 million shares of Tribune stock were available for public trade on the New York Stock Exchange, but starting April 25, 2007, Tribune began a tender offer to repurchase up to 126 million publicly traded shares. Following the stock repurchase, Tribune merged with the ESOP and all Tribune shares not held by the ESOP were retired or canceled, making the ESOP Tribune's sole shareholder

In granting partial judgment for the participants, the court first noted that ESOPs are generally exempt from ERISA's prohibited transaction rules that apply to the purchase of employer stock, so long as certain requirements are met. One of those requirements is that the company stock purchased must satisfy the Internal Revenue Code's definition of “qualifying employer securities.” The court then explained how the tax code interacts with ERISA when it comes to the regulation of ESOPs. The court came to the conclusion that the tax code's definition of “qualifying employer securities,” which is defined as “common stock issued by the employer ... which is readily tradable on an established securities market,” is not inconsistent with ERISA's use of that term in its prohibited transaction rules. Accordingly, the court thus found that for an ESOP's purchase of stock to be exempt from ERISA's prohibited transaction rules, “employer securities” purchased by an ESOP must meet the definition of that term in tax code Section 409(l), which requires that the stock be “readily tradable on an established securities market.” Here, according to the court, the nearly 9 million shares in unregistered stock purchased by the ESOP were not tradable on established securities markets and therefore, the ESOP's purchase of Tribune's stock was a prohibited transaction under ERISA.

Wednesday, November 10, 2010

DOL Files Amicus Brief in Ninth Circuit Stock Drop Case

The United States Department of Labor ("DOL") recently urged the U.S. Court of Appeals for the Ninth Circuit to grant rehearing and overturn a three-judge panel's recent ruling embracing what is known as the “presumption of prudence” that often places a heavy burden on plaintiffs in employer stock-drop lawsuits, by filing an amicus brief in Quan v. Computer Sciences Corp., 9th Cir., No. 09-56190. The brief, which is posted to the DOL's website , argues that the three-judge panel's adoption of the “presumption of prudence” conflicts with the plain statutory language of ERISA. According to DOL, by adopting the presumption, the three-judge panel replaced ERISA's objective “prudence” standard of care with a “more lenient, judicially-created standard,” the brief said. DOL also argued in its brief that the full panel of Ninth Circuit judges should rehear the case because the three-judge panel's decision conflicts with U.S. Supreme Court and Ninth Circuit decisions concerning the court's authority to create federal common law that contravenes ERISA's plan language and purposes. DOL also argued that rehearing is warranted because the three-judge panel's decision improperly created a “safe harbor” from fiduciary obligations for employer stock investment, which could put billions of dollars in pension plan assets “at undue risk.”

We have written and reported about several recent "stock drop" cases over the past several months. Many courts deciding these cases have adopted the "Moench" presumption of prudence, which provides plan fiduciaries with significant safeguards in their determination as to whether and when to rid a pension plan portfolio of the option of offering employer stock. DOL obviously sees such decisions as a threat to the potential well-being plan participants and beneficiaries and, through this amicus brief, seeks to hold fiduciaries to standards that require more diligence. It will be interesting to see whether DOL's brief impacts the Ninth Circuit's decision and whether other courts will follow suit.

EEOC Issues Final GINA Regulations

On November 9, 2010, the U.S. Equal Employment Opportunity Commission ("EEOC") issued final regulations implementing the employment provisions of the Genetic Information Nondiscrimination Act of 2008 ("GINA"). GINA prohibits use of genetic information to make decisions about health insurance and employment, and restricts the acquisition and disclosure of genetic information. The regulations include clarifications and refinements made in response to comments received during the regulations' notice and comment period.

Congress enacted GINA with strong bipartisan support in 2008, in response to concerns that patients would decline to take advantage of the increasing availability of genetic testing out of concern that they could lose their jobs or health insurance if such tests revealed adverse information. Title II of GINA prohibits employment discrimination based on genetic information, and restricts the acquisition and disclosure of genetic information. Genetic information includes information about individuals’ genetic tests and the tests of their family members; family medical history; requests for and receipt of genetic services by an individual or a family member; and genetic information about a fetus carried by an individual or family member or of an embryo legally held by the individual or family member using assisted reproductive technology.

The final regulations provide examples of genetic tests; more fully explain GINA’s prohibition against requesting, requiring, or purchasing genetic information; provide model language employers can use when requesting medical information from employees to avoid acquiring genetic information; and describe how GINA applies to genetic information obtained via electronic media, including websites and social networking sites.

The regulations are significant in that they represent the first expansion of EEOC's scope and authority since the enactment of the Americans with Disabilities Act of 1990.

Tuesday, November 9, 2010

NLRB Complaint Alleges Illegal Termination For Facebook Comments

A complaint issued by the National Labor Relation Board's ("NLRB") Hartford regional office on October 27 alleges that an ambulance service illegally terminated an employee who posted negative remarks about her supervisor on her personal Facebook page. The complaint also alleges that the company, American Medical Response of Connecticut, Inc., illegally denied union representation to the employee during an investigatory interview, and maintained and enforced an overly broad blogging and internet posting policy.

When asked by her supervisor to prepare an investigative report concerning a customer complaint about her work, the employee requested and was denied representation from her union, Teamsters Local 443. Later that day from her home computer, the employee posted a negative remark about the supervisor on her personal Facebook page, which drew supportive responses from her co-workers, and led to further negative comments about the supervisor from the employee. The employee was suspended and later terminated for her Facebook postings and because such postings violated the company’s internet policies.

An NLRB investigation found that the employee’s Facebook postings constituted protected concerted activity, and that the company’s blogging and internet posting policy contained unlawful provisions, including one that prohibited employees from making disparaging remarks when discussing the company or supervisors and another that prohibited employees from depicting the company in any way over the internet without company permission. Such provisions constitute interference with employees in the exercise of their right to engage in protected concerted activity. A hearing on the case is scheduled for January 25, 2011.

As this case shows, the tracking of employees' use of social media is a hot issue in the employment and labor law arena. We previously discussed an employee benefits matter in which an insurer denied long-term care disability insurance to an employee based on pictures the employee had posted of herself on a beach vacation on Facebook.

The National Labor Relations Board is an independent federal agency vested with the authority to safeguard employees’ rights to organize and to determine whether to have a union as their collective bargaining representative. The Agency also acts to prevent and remedy unfair labor practices committed by private sector employers and unions, as well as cases arising from the United States Postal Service.

Wednesday, November 3, 2010

Tufts Professor Sues For Sex Discrimination

A former department chairwoman at Tufts University's dental school is suing for sex discrimination and retaliation, alleging she earned a lower salary than a male counterpart. The plaintiff, Catherine Hayes, was chairwoman of the Department of Public Health and Community Service at the Tufts University School of Dental Medicine from August 2006 to September 2010. She filed the case, Hayes v. Tufts University, in the United States District Court for the District of Massachusetts on Oct. 28. Her legal claims include violation of Massachusetts and federal gender discrimination laws, violation of the Massachusetts and federal equal pay acts, retaliation under state and federal anti-discrimination and equal pay laws and interference with rights under the Massachusetts anti-discrimination law. The defendants include Tufts, its dental school, the current dental school dean, and the dental school's executive associate dean.

The lawsuit alleges that, in the midst of a salary dispute with the dental school, Hayes learned that the chairman of the school's pediatric dentistry department was earning $250,000 per year. The lawsuit claims he was hired at the same time as Hayes but at a lower full-time equivalent. At the time, Hayes earned $184,000 per year. The lawsuit also alleges that Hayes' department includes seven divisions employing 115 faculty and staffers compared to the two divisions and 16 employees in the pediatrics department - implying that Hayes had greater duties and responsibilities (and therefore should have been paid at least as much as her male counterpart). The lawsuit also alleges that Hayes' relationship with her dean and executive associate dean "began to suffer immediately after she brought her concerns to them in April 2009." The dean and executive associate dean allegedly cancelled meetings, excluded Hayes from hiring and salary decisions about new employee, sand cut her out of fiscal 2011 budget discussions.

The lawsuit also alleges damage to Hayes' character. By way of example, the lawsuit alleges that a university office of equal opportunity investigation made incorrect findings that "impugned her character." Hayes also claims that the dean made misstatements about her actions related to a joint project with the Tufts University School of Medicine. She also claims that the defendants improperly and publicly accused her of running a budget deficit in her department in the fall of 2009. According to the lawsuit, their conclusion was based on failing to count existing grant funding and placing faculty costs from another department into her budget. The lawsuit further alleges that, after Hayes also began a doctor-approved medical leave under the Family and Medical Leave Act in July 2010 because of work-related stress, the defendants engaged in surveillance of Hayes and her activities and sent her harassing e-mail. After Hayes returned to work in August 2010, the defendants denied her request for an additional week of medical leave, and she resigned in September 2010.

Monday, November 1, 2010

GM Plans to Infuse Pension Plans With Six Billions Dollars

General Motors Co. reported last week that in advance of its planned initial public offering, it took a series of steps aimed at reducing debt, shoring up its financial position, and funding the company's pension plans. GM said it repaid $2.8 billion on a 9 percent secured note provided to the United Auto Workers Retiree Medical Benefits Trust. In addition, GM obtained a $5 billion five-year revolving credit facility from a syndicate of banks, and plans—on completion of the IPO—to purchase all $2.1 billion of 9 percent Series A preferred stock held by the Treasury Department. GM also plans to contribute at least $4 billion in cash and $2 billion in common stock to its hourly and salaried pension plans. The stock contributions to the pension plans are subject to Labor Department review, and the number of shares will depend on the offering price for GM common stock, GM said. It will be valued as a plan asset for pension funding purposes at the time of contribution and for balance sheet purposes when the shares become fully transferable, the company said.

PBGC Alert - Terrence Deneen To Step Down

The Pension Benefit Guaranty Corporation ("PBGC") issued a press release stating that Terrence M. Deneen, PBGC's veteran Chief Insurance Program Officer, has announced plans to retire from public service in mid-January. PBGC is the federal agency that guarantees payment of private pension benefits when companies and pension plans fail. It purports to protect some 44 million Americans in over 29,000 private defined benefit pension plans. The PBGC pays benefits using insurance premiums and assets and other recoveries from plans and their sponsors; it receives no taxpayer funds. New PBGC Director Josh Gotbaum stated in the press release that “Terry Deneen has provided outstanding leadership,” and that “[w]e will miss his wise counsel and his extraordinary breadth of experience with both bankruptcy and pensions." Mr. Gotbaum added that, filling Mr. Deneen's shoes will be challenging. In his current post since 2005, Mr. Deneen oversees a wide range of risk management and loss mitigation functions. He leads teams of financial analysts, lawyers and actuaries who have achieved great success in negotiating recoveries in bankruptcies and corporate restructurings. He administers a multiemployer insurance division that is currently focused on remediating the complex problems of troubled multiemployer plans. Mr. Deneen also supervises the PBGC professionals who monitor and analyze risks to corporate plan sponsors and work with companies to secure financial protection for their plans.