Labor & Employment – ERISA – 401(k) Plan – Stock Divestment – Post De-Merger

Tatum v. R.J. Reynolds Tobacco Co. (Lawyers Weekly No. 003-006-16, 65 pp.) (N. Carlton Tilley Jr., J.) 1:02-cv-00373; M.D.N.C.

Holding: Despite the imprudent decision-making process that led the RJ Reynolds defendants to decide to eliminate Nabisco stock from their 401(k) retirement plan, their ultimate decision was objectively prudent since a hypothetical prudent fiduciary would have made the same decision anyway.

Judgment for defendants.

When RJ Reynolds and Nabisco split, a prudent fiduciary at the time (1999 to 2000) would have known that the RJ Reynolds 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.

In addition to those risks, a prudent fiduciary would have taken into account the tobacco litigation risk that was considerable and the consequent bankruptcy risk that was noteworthy.

A prudent fiduciary would also have known that Nabisco Group Holdings’ (NGH’s) returns were very highly correlated with the RJR Tobacco Common Stock returns. During 1999, a fiduciary monitoring the NGH Common Stock Fund and the Nabisco Common Stock Fund (the Nabisco Funds) would have seen that Nabisco stock was losing value and that RJR (R.J. Reynolds Tobacco Co. and R.J. Reynolds Tobacco Holdings, Inc.) was continuing to experience adverse rulings and verdicts in tobacco litigation. The fact that NGH had indemnification agreements with RJR was not mitigating the situation, particularly in light of the Engle v. R.J. Reynolds Tobacco Co. litigation and the potential for large tobacco verdicts that could jeopardize RJR’s ability to post an appeal bond, pay a large verdict, or protect NGH.

Because NGH and Nabisco traded on the New York Stock Exchange, a generally efficient market, research at the time would have revealed that there was no reason to expect extraordinary returns based upon analyst recommendations. Carl Icahn’s subsequent unexpected bid to buy Nabisco was followed by an unforeseen stock-price increase.

RJR’s six-month time frame for the divestment and the rationale for it – to give employees notice and allow them to reallocate their funds – while arrived at without investigation or research, was indeed a reasonable time frame.

Defendants have proven by a preponderance of the evidence that a prudent fiduciary would have decided to divest the Nabisco Funds and held to the determination that divestiture was a benefit to plan participants and retained the same time line for divestment.