Herman v. Nationsbank Trust Company ( 1997 )

United States Court of Appeals,
Eleventh Circuit.
No. 95-8934.
Alexis M. HERMAN, Secretary of the United States Department of Labor, Plaintiff-Appellee,
v.
NATIONSBANK TRUST COMPANY (Georgia), National Association, a National Banking
Association, Defendant,
Sovran Capital Management Corporation, a Virginia Corporation; NationsBank of Georgia,
N.A., Defendants-Appellants.
Nov. 5, 1997.
Appeal from the United States District Court for the Northern District of Georgia. (No. 1:92-CV-
1474-HTW), Horace T. Ward, Judge.
Before COX and CARNES, Circuit Judges, and FAY, Senior Circuit Judge.
CARNES, Circuit Judge:
NationsBank of Georgia, N.A. ("NationsBank") is the trustee of an employee stock
ownership plan ("ESOP") governed by the Employee Retirement Income Security Act of 1974, as
amended, 29 U.S.C. §§ 1000-1461 ("ERISA" or "the Act").1 The Secretary of the Department of
Labor brought this lawsuit against NationsBank, claiming it had violated ERISA by failing to
exercise independent judgment in responding to competing tender offers for the ESOP's shares.
After the district court denied both parties' motions for summary judgment, NationsBank brought
this interlocutory appeal pursuant to 28 U.S.C. § 1292(b). For the reasons set forth below, we affirm
in part and reverse in part the district court's order denying summary judgment to both parties.
I. BACKGROUND
A. FACTS
This case arose out of a battle over control of Polaroid Corporation ("Polaroid"). The facts
below are not disputed by the parties.
1. The Genesis of the Polaroid ESOP
1
An employee stock ownership plan is an ERISA plan which invests primarily in the
employer's stock. See 29 U.S.C. § 1107(d)(6)(A).
In 1988, Polaroid was the subject of a hostile takeover attempt by Shamrock Acquisitions,
III, Inc. ("Shamrock"). Partly in response to the takeover threat, Polaroid established an ESOP
called the Polaroid Stock Equity Plan.2 Eventually Polaroid named Citizens & Southern Trust
Company, later known as NationsBank, as the trustee of the ESOP. Sovran Capital Management
Corporation was retained to provide investment advice to NationsBank.
At its inception, the Polaroid ESOP held over 9.7 million shares of newly-issued Polaroid
common stock, constituting 13.4% of Polaroid's common stock. The ESOP shares were purchased
with a $15 million cash contribution from Polaroid and $285 million that Polaroid loaned the ESOP.3
Polaroid funded the ESOP by imposing a 5% pay cut and reducing benefits.
ESOP shares purchased with Polaroid's cash contribution were allocated to accounts for
ESOP participants in proportion to each participant's compensation. ESOP shares that were
purchased with the loaned funds were held and continue to be held in a suspense account, the
"Unallocated Common Stock Account," as collateral for the loan. As the ESOP makes loan
payments to Polaroid (with contributions from Polaroid), shares are released from the Unallocated
Common Stock Account and allocated to the individual participants' accounts in proportion to each
participant's compensation.
2. Plan Provisions on Voting Shares
The Polaroid ESOP has several provisions that address the voting of ESOP shares. In
general, the ESOP provides for "pass-through voting," which allows participants to vote their
allocated shares like ordinary shareholders. Without that provision, the Polaroid ESOP would not
2
Shamrock sought an injunction against Polaroid's creation of the ESOP, claiming it was an
illegal anti-takeover device. See Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 269-
70 (Del.Ch.1989). The Delaware Chancery Court denied the injunction. The court found that
the ESOP's voting provisions gave plan participants control over the ESOP shares. See id. at
273-74. Based largely upon that finding, the court held that the ESOP was not an illegal
anti-takeover device. See id. at 274.
3
This "paper sale" of the newly issued stock resulted in significant tax savings to Polaroid.
See 26 U.S.C. § 404(a)(9); see also Summers v. State Street Bank and Trust Co., 104 F.3d 105,
106 (7th Cir.1997) (describing a similar transaction and its tax consequences).
2
qualify for tax benefits. See 26 U.S.C. § 409(e). The ESOP further provides that in the event of a
tender offer, plan participants may direct the trustee to tender or not tender their allocated shares.
The ESOP prohibits the trustee from tendering a participant's shares unless the participant
specifically instructs the trustee to tender. It states that the trustee should interpret a participant's
silence as a direction not to tender his or her allocated shares. In addition, the ESOP provides for
"mirror voting," which means that the trustee is instructed to tender unallocated shares held by the
plan in the same proportion as it tenders allocated shares. According to the briefs of the amici
curiae, provisions for pass-through voting of allocated shares and mirror voting of unallocated shares
are commonly included in ESOPs.
According to the ESOP documents, the trustee's liability for its conduct during a tender offer
depends, in part, on how well the trustee complies with the other voting provisions. The Polaroid
ESOP states that Polaroid will indemnify the trustee for any liability incurred in responding to tender
offers, so long as the trustee followed the participant direction provisions of the plan.
If a tender offer is accepted, the ESOP further provides that, except in limited circumstances
not relevant to this appeal, the trustee must reinvest all tender offer proceeds in Polaroid stock.
3. The Tender Offers
In September 1988, Shamrock made a tender offer of $42 per share for all of Polaroid's
common stock, contingent upon Shamrock obtaining a judgment in Delaware state court that the
Polaroid ESOP shares were invalidly issued. Shamrock later raised its offer to $45 per share.
Polaroid responded in January 1989 with a selftender offer of $50 per share for a maximum of 16
million of the 71.5 million shares of Polaroid common stock (including the ESOP shares). The
Polaroid offer provided that if more than 16 million shares were tendered, Polaroid would buy
tendered shares on a pro-rata basis and return extra shares to each tenderer.
On February 23, 1989, NationsBank mailed all Polaroid ESOP participants a brief
description of the competing tender offers, advising them of their rights under the plan to instruct
NationsBank by March 23, 1989 either to: (1) tender to Polaroid, (2) tender to Shamrock, or (3) not
3
tender. NationsBank informed participants that if they did not return an instruction form, their
non-responses would be treated as instructions not to tender. However, the letter did not advise
participants that unallocated shares would be voted in the same proportion as allocated shares.
On the same date, the Secretary of Labor sent NationsBank an unsolicited letter outlining
the Secretary's view of NationsBank's fiduciary responsibilities in light of the competing tender
offers. See Letter from the Department of Labor to Citizens & Southern Trust Company (February
23, 1989), reprinted in 16 Pens. & Ben. Rep. (BNA) 390 (March 6, 1989) ("Polaroid letter"). The
Secretary insisted that an ESOP trustee bears the final responsibility for making tender offer
decisions with regard to the plan's unallocated shares and its allocated non-voted shares.4 The
Secretary advised that a trustee may follow plan provisions relating to participant direction of such
shares only to the extent permitted by § 404(a)(1)(D) of ERISA, 29 U.S.C. § 1104(a)(1)(D). The
Secretary did not suggest any restriction on a trustee following participant directions as to allocated
shares that were actually voted.
On March 20, 1989, NationsBank's Trust Policy Committee met to consider the tender
options on behalf of the ESOP. The Committee initially discussed the Secretary's letter and what the
Committee understood to be its legal responsibilities in tendering the ESOP's shares. The
Committee was advised by its legal counsel that it had the responsibility of deciding how the shares
could be voted prudently, and that it had the duty to disregard plan provisions if they led to an
imprudent result.
The Committee then proceeded to determine the prudence of each option available to the
plan. The Committee observed that the gain or loss to the plan resulting from tendering shares to
either offer, or from not tendering shares, would depend upon the post-tender market situation. It
noted that under the terms of the plan, the ESOP probably would be required to invest any tender
proceeds in Polaroid stock purchased on the open market. The Committee noted that, if it tendered
4
By "allocated non-voted shares," we mean those shares that were not returned to
NationsBank by participants. By operation of the Polaroid ESOP, those non-voted shares were
treated as votes not to tender by NationsBank.
4
shares and the post-tender market price of Polaroid shares was less than the amount of the tender
offer accepted, the ESOP would obtain more shares than it had before. However, if it tendered
shares and the market price of Polaroid shares rose above the tender price before full reinvestment,
the ESOP would end up with fewer shares than it had before tendering.
In making its decision about what would be prudent, the Committee attempted to predict
whether post-tender market prices would exceed or fall below the tender offer prices. It noted two
factors that could cause the market price to rise. First, Shamrock had expressed its intention to
continue its takeover attempt. The Committee believed Shamrock might raise its offering price to
over $50 per share. Second, Polaroid was involved in pending copyright litigation that could result
in a billion-dollar damage award in Polaroid's favor. The Committee believed that such an award,
if obtained, would greatly increase Polaroid's stock price.
Based on those considerations, the Committee concluded that the post-tender market price
of Polaroid stock was uncertain enough that it would be prudent to choose any of the available
options: tendering shares to the self-tender offer, tendering to the Shamrock offer, or not tendering.
After reaching that conclusion, the Committee decided to follow the plan provisions on the tendering
of allocated and unallocated shares held by the ESOP, i.e., as to all of the ESOP's shares.
On March 23, 1989, NationsBank tendered the ESOP shares in accordance with the
provisions of the plan and the participants' votes. In all, NationsBank tendered 5,239,460 of the
ESOP's shares to Polaroid. NationsBank withheld 4,332,044 shares. Of those shares 53,387 were
withheld based on participants' directions not to tender. An additional 34,581 of those shares were
withheld because NationsBank planned to tender those shares to Shamrock in accordance with
participants' directions, but Shamrock withdrew its offer before the shares were tendered. The
remaining 4,244,076 withheld shares were withheld because of the plan's mirror voting provision.
NationsBank tendered all of the (non-ESOP) shares it held in discretionary trust accounts (3,900
shares) to Polaroid.
5
After failing in its attempt to have the Polaroid ESOP invalidated, Shamrock tendered each
of its Polaroid shares to Polaroid. In all, non-ESOP Polaroid shareholders (including Shamrock)
tendered 84 percent of their shares to Polaroid.
Polaroid accepted 27.7747% of the shares tendered by each tendering shareholder. Polaroid
paid the ESOP $72,762,200 for the shares it tendered, and NationsBank reinvested those funds in
Polaroid stock between April 3 and April 12, 1989, at prices ranging from $37.41 to $37.67 per
share. As a result of the repurchase, the ESOP's stake in Polaroid was increased by 482,073 shares.
If NationsBank had tendered all of the unallocated shares and the allocated non-voted shares held
by the ESOP, the ESOP would have obtained an additional 332,917 shares.
B. PROCEDURAL HISTORY
The Secretary filed suit against NationsBank in 1992.5 In Count One of the complaint, the
Secretary claimed that NationsBank violated §§ 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. §§
1104(a)(1)(A) and (B), by failing to tender all of the unallocated shares and the allocated non-voted
shares to Polaroid. In Count Two, the Secretary alleged that an indemnification provision in the
ESOP, which stated that Polaroid would indemnify NationsBank for any liability incurred in
responding to tender offers so long as NationsBank followed the participant direction provisions of
the plan, created a disincentive for NationsBank to exercise its independent judgment and, therefore,
encouraged NationsBank to breach its fiduciary obligations under ERISA.
The district court granted summary judgment to the Secretary on Count Two of the
complaint. The court agreed with the Secretary's view that the indemnification provision provided
NationsBank with a financial incentive to refrain from exercising its independent judgment. See
Martin v. Nationsbank of Georgia, N.A., 16 Employee Benefits Cas. (BNA) 2138, 2141, 1993 WL
5Lynn Martin was the Secretary of the Department of Labor in 1992 and the original plaintiff
in this action. Robert Reich succeeded Martin in 1993 and was substituted as the plaintiff.
Alexis Herman is now Secretary of the Department of Labor and has been substituted as the
plaintiff.
6
345606 (N.D.Ga.1993). That incentive, the court held, violated general trust law principles and
ERISA's command that trustees act solely in the interests of participants and beneficiaries. See id.The parties proceeded with discovery on Count One of the Secretary's complaint. After
completing discovery, both parties moved for summary judgment on Count One. In an order and
opinion, the court held that NationsBank could not rely upon participants' votes of their allocated
shares and the ESOP's mirror voting provision in deciding whether and how to tender unallocated
shares. Instead, the court held, NationsBank was required to exercise its independent judgment and
follow plan provisions only if they led to a prudent result. The court also held that NationsBank
possessed the exclusive responsibility for deciding whether to tender allocated non-voted shares, and
that ERISA barred NationsBank from interpreting participants' non-responses as directions not to
tender.
However, the court did not grant summary judgment in favor of the Secretary, because it held
that genuine issues of fact exist regarding whether NationsBank acted prudently in not tendering to
Polaroid the ESOP shares in question, i.e., all of the ESOP shares except the allocated ones that were
actually voted. It also held that genuine issues of fact exist as to whether NationsBank acted solely
in the interest of plan participants.
NationsBank requested that the district court certify for interlocutory appeal, pursuant to 28
U.S.C. § 1292(b), its order denying the parties' motions for summary judgment on Count One of the
Secretary's complaint. NationsBank did not seek certification of the court's order as to Count Two,
in which the court had struck down the indemnification provision. The district court did certify its
order as to Count One, recognizing that there is substantial ground for difference of opinion as to
"the proper standard to be applied to the Trustee's decision on whether to follow the plan document
and tender unallocated shares as directed by the participants." We granted permission for the
interlocutory appeal.6
6
Although the district court discussed only the unallocated shares issue in its order certifying
its summary judgment order for interlocutory appeal, we have the entire summary judgment
order before us pursuant to 28 U.S.C. § 1292(b). See, e.g., Grayson v. K Mart Corp., 79 F.3d
7II. STANDARD OF REVIEW
Summary judgment should be granted only when there is no genuine issue regarding a
material fact, and judgment is appropriate as a matter of law. See Fed.R.Civ.P. 56. This Court must
apply the same legal standards that the district court was required to apply in its summary judgment
decision; therefore, the district court's legal conclusions are subject to de novo review. See Southern
Solvents, Inc. v. New Hampshire Ins. Co., 91 F.3d 102, 104 (11th Cir.1996).
III. DISCUSSION
This appeal requires us to apply ERISA's fiduciary rules to a species of ERISA plans, the
ESOP.
A. STANDARDS GOVERNING THE MANAGEMENT OF ASSETS BY ERISA TRUSTEES
AND FIDUCIARIES
ERISA sets out a fiduciary scheme that applies to all employee benefit plans including
ESOPs. It requires that the assets of an employee benefit plan be held in trust by at least one trustee.
See 29 U.S.C. § 1103(a). Generally, "the trustee or trustees shall have exclusive authority and
discretion to manage and control the assets of the plan." Id. Where the trustee has the exclusive
authority and discretion to manage and control plan assets, the trustee is the quintessential fiduciary.
Under ERISA:
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary
authority or discretionary control respecting management of such plan or exercises any
authority or control respecting management or disposition of its assets, (ii) he renders
investment advice for a fee ..., or (iii) he has any discretionary authority or discretionary
responsibility in the administration of such plan.
29 U.S.C.A. § 1002(21)(A) (West Supp.1997).
Insofar as a trustee has fiduciary authority and control over plan assets, a trustee is governed
by ERISA's strict fiduciary rules. "ERISA imposes high standards of fiduciary duty upon those
responsible for administering an ERISA plan and investing and disposing of its assets." Martin v.
Feilen, 965 F.2d 660, 664 (8th Cir.1992); see also 29 U.S.C. § 1104(a) (containing standards for
1086, 1096 (11th Cir.1996). Both parties have argued the allocated non-voted shares issue as
well as the unallocated shares issue, and we will address both issues.
8
fiduciaries). Indeed, the standard of care owed by ERISA fiduciaries, including trustees, has been
described as "the highest known to law." Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d
Cir.1982) (Friendly, J.). ERISA mandates, among other requirements, that:
(1) a fiduciary shall discharge his duties with respect to a plan solely in the interest of the
participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such matters
would use ...;
(C) by diversifying the investments of the plan ... [a requirement not applicable to
ESOPs, see 29 U.S.C. § 1104(a)(2) ]; and
(D) in accordance with the documents and instruments governing the plan insofar as
such documents and instruments are consistent with [ERISA]....
29 U.S.C.A. § 1104(a) (West 1985 & West Supp.1997). ERISA also subjects fiduciaries to personal
liability for breaching the duties imposed by § 1104(a), see id. § 1109, and for certain breaches by
co-fiduciaries of their duties, see id. § 1105.
As we mentioned above, ERISA provides that trustees usually shall have exclusive authority
and control over plan assets. However, ERISA allows a plan to allocate authority and control over
plan assets to parties other than trustees, if that allocation fits one of three exceptions. In the first
exception, the plan may delegate the authority to manage plan assets to one or more investment
managers. See id. § 1103(a)(2). In the second exception, the plan may provide for individual
participant accounts and give participants control over the assets in their accounts. See id. § 1104(c).
Under applicable regulations the participant account exception in § 1104(c) does not apply to
ESOPs; the Secretary has interpreted that provision to apply only to plans giving participants a
range of investments from which to choose. See 29 C.F.R. § 2550.404c-1 (1996). In the third and
final exception, the plan may provide "that the trustee or trustees are subject to the direction of a
named fiduciary who is not a trustee...." 29 U.S.C. § 1103(a)(1).
9
If a plan falls under one of the three exceptions to exclusive trustee authority, then the
responsibilities of the trustee are correspondingly lessened. For example, if the plan provides that
an investment manager has the authority to control plan assets, then the trustee is not liable for losses
caused by the investment manager. See id. § 1105(d)(1); see also Lowen v. Tower Asset Mgt., Inc.,
829 F.2d 1209, 1219 (2d Cir.1987). Or, if a plan gives participants control over individual accounts
pursuant to 29 U.S.C. § 1104(c) (which is not applicable to ESOPs), the trustee is not liable for any
loss caused by any breach which results from the participant's exercise of control over those assets.
See 29 U.S.C. § 1104(c)(2)(B).
Finally, because of the third exception, to the extent that a plan allocates the authority to
manage and control plan assets to a named fiduciary, the trustee becomes "subject to proper
directions of such fiduciary which are made in accordance with the terms of the plan and which are
not contrary to this chapter...." Id. § 1103(a)(1) (West 1985). In other words, insofar as a trustee
acts at the direction of a named fiduciary in accordance with the terms of the plan and ERISA's
requirements, he is not subject to the fiduciary requirement in § 1104(a) to act prudently. See
Maniace v. Commerce Bank of Kansas City, N.A., 40 F.3d 264, 267 (8th Cir.1994) (holding that
directed trustee was not acting as a fiduciary in following named fiduciary's direction and did not
need to weigh the merits of those directions). But see FirsTier Bank, N.A. v. Zeller, 16 F.3d 907,
911 (8th Cir.1994) (holding that trustee, who was subject to direction of the plan sponsor to make
loans to plan participants, was not relieved of its fiduciary duty to conform to the prudent man
standard of care in making loans).
In this appeal, we are concerned with the third exception, the one provided in 29 U.S.C. §
1103(a)(1) for trustees who are directed by named fiduciaries. Specifically, we must decide whether
Polaroid ESOP participants may be named fiduciaries who can direct NationsBank's asset
management decisions with regard to unallocated shares and allocated but non-voted shares.
B. THE PARTIES' CONTENTIONS
10
NationsBank argues that participants in the Polaroid ESOP are named fiduciaries with
respect to the tendering of all shares held by the ESOP, making NationsBank merely a directed
trustee with regard to the tendering of ESOP shares, subject only to § 1103(a)(1)'s commands to
follow plan provisions that are not contrary to ERISA. In NationsBank's view, it cannot be held
liable for making imprudent tendering decisions, because it is not governed by the prudent man
standard in § 1104(a)(1)(B). This litigation position is, of course, contrary to NationsBank's
conduct. As we have previously discussed, pursuant to counsel's advice, NationsBank undertook
to determine what action was prudent as to the ESOP shares. Only after determining that any and
all actions in response to the tender offer would be prudent did NationsBank follow participant
directions according to the plan.
NationsBank's fallback position in this litigation is that even if § 1104(a)(1)(B) applies to
NationsBank's conduct in tendering the shares, it may not be held liable because it acted prudently.
The district court held that the question of NationsBank's prudence could only be decided after a
trial.
The Secretary takes the position that ERISA allows ESOP participants to be named
fiduciaries only with respect to allocated shares for which participants give explicit directions. See
Letter from the Department of Labor to Ian D. Lanoff (September 28, 1995) at 3, reprinted in 22
Pens. & Ben. Rep. (BNA) 2249, 2250 ("Lanoff letter"). She agrees with NationsBank that if a
trustee follows participants' explicit directions regarding allocated shares, the trustee's conduct with
respect to those shares is judged only by whether it is "in accordance with the plan terms," as well
as "not being contrary to the provisions of ERISA."7 Id. (footnote omitted). She concedes that
where the plan gives participants the authority to direct the trustee's vote of the allocated shares, the
directed trustee's actions concerning allocated, voted shares are judged by § 1103 (the directed
7
The trustee's conduct in following explicit directions with regard to allocated shares—as
distinguished from the trustee's conduct relating to unallocated shares or allocated non-voted
shares—would not be subject to a prudence test. See Lanoff letter at 3-4, reprinted in 22 Pens.
& Ben. Rep. (BNA) 2249, 2250-51.
11
trustee standard), not § 1104 (the standard for fiduciaries). See id. ("[Y]ou, as Plan trustee, may
follow such directions subject to the standards of section 403(a) [29 U.S.C. § 1103(a) ] described
above.").
The Secretary distinguishes the exercise of control by plan participants over unallocated
shares and allocated non-voted shares held by an ESOP from the exercise of control over allocated
voted shares. She takes the position that participants may never be named fiduciaries with regard
to unallocated shares or allocated non-voted shares, and, therefore, that participants cannot direct
a trustee pursuant to 29 U.S.C. § 1103(a)(1) with regard to those shares. Unless another exception
to trustee responsibility and liability is applicable, the Secretary's position is that § 1104(a)(1),
including the prudent man standard, governs a trustee's decisions with respect to unallocated and
allocated non-voted shares.
The Secretary also makes a more narrow argument in this appeal with regard to the
unallocated shares. She maintains that even if ESOP participants may be named fiduciaries with
regard to unallocated shares in some circumstances plans, the Polaroid ESOP participants were not
named fiduciaries with regard to the unallocated shares in their plan, because the tender notice did
not inform the participants that their action or inaction would affect the unallocated shares.
The Secretary further contends that the only prudent decision for NationsBank to make in
light of the competing tender offers was to tender all of the ESOP's shares to Polaroid. According
to the Secretary, NationsBank violated § 1104(a)(1)(B) in two ways: (1) by tendering unallocated
shares in proportion to the plan participants' votes of their allocated shares, as the plan provided,
instead of tendering all of the unallocated shares to Polaroid; and (2) by not tendering to Polaroid
allocated shares for which NationsBank received no explicit directions from the plan participants.
However, the Secretary does not challenge NationsBank's decision to tender allocated voted shares
in accordance with participants' directions, even where those directions were to tender to Shamrock
or not to tender. The Secretary has no quarrel—at least in this case—with NationsBank following
12
the explicit directions of plan participants as to the shares allocated to the participants, even if the
directed action was imprudent.
C. DEFERENCE TO THE SECRETARY'S INTERPRETATION
We begin by acknowledging the deference we owe the Secretary's interpretation of the
controlling act. The Secretary of the Department of Labor is charged with enforcing ERISA and its
fiduciary duties, and she has the authority to render authoritative interpretations of the Act. See 29
U.S.C. § 1132(a)(2). Unless Congress, in enacting ERISA, demonstrated clearly its intent with
regard to the questions before us, we must defer to the Secretary's official interpretations of ERISA
if they are reasonable. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984); Jaramillo v. Immigration and Naturalization
Serv., 1 F.3d 1149, 1152 (11th Cir.1993) (en banc). Neither NationsBank nor the Secretary contends
that Congress has spoken directly to the ERISA issues presented in this appeal, and we conclude that
Congress' intent on these matters is less than clear. Consequently, our role in this case is quite
limited, at least where the Secretary has taken an official position:
Under Chevron a court is not to search for what in the court's view is the best possible
construction of the statute....Realizing that administrators and judges might well disagree
about the wisdom of a policy behind an agency's construction of a statutory provision, the
Supreme Court admonished courts not to forget to whom the authority and responsibility for
such policy making is entrusted[.]
Jaramillo, 1 F.3d at 1152-53.
NationsBank claims we should not give Chevron deference to the Secretary's interpretation
of ERISA, because that interpretation is espoused only in litigation documents and opinion letters,
and not in formal regulations. That position may have validity as to litigation documents, but not
as to pre-litigation opinion letters, at least not in this circuit. Although the Secretary has not
promulgated regulations on the issues presented in this appeal, we still owe her pre-litigation opinion
letter views considerable deference. See Blessitt v. Retirement Plan for Employees of Dixie Engine
Co., 848 F.2d 1164, 1172 (11th Cir.1988) (deferring to agency interpretation of regulation in opinion
letter); Williams v. Wright, 927 F.2d 1540, 1545 (11th Cir.1991) ("Although these [Department of
13
Labor/ERISA] opinion letters are not binding in this court, the views of the agency entrusted with
interpreting and enforcing the ERISA statute carry considerable weight."); Coca Cola Co. v.
Atchison, Topeka, and Santa Fe Ry. Co., 608 F.2d 213, 222 (5th Cir.1979) (holding that agency
opinion letters interpreting regulations, "although less authoritative than regulations or formal
decisions, are entitled to be "weighed carefully' and to "great deference' if they state a reasonable
conclusion") (citation omitted); see also State of Georgia Dept. of Medical Assistance v. Shalala,
8 F.3d 1565, 1569 & n. 8 (11th Cir.1993) (deferring to agency explanatory manual interpreting
statute over which agency has been delegated administrative authority). On those matters in this
appeal where the Secretary made an official pronouncement before this litigation began, we must
accord her view deference.
According to NationsBank, we should also refuse to defer to the Secretary's interpretations
of ERISA, because the Secretary invoked the deliberate process privilege during discovery.8
NationsBank fails to cite any cases holding that an agency's interpretation of a statute does not
deserve deference if the agency invokes that privilege. Even if NationsBank presented persuasive
authority on this matter, however, we would be reluctant to address the issue. The district court's
order denying summary judgment to both parties, from which NationsBank has appealed, did not
address this question. NationsBank did not raise the issue before this Court until it submitted its
reply brief. Under these circumstances, we decline to decide whether an agency's interpretation of
a statute deserves less deference due to the invocation of the deliberative process privilege. See
United States v. Coy, 19 F.3d 629, 632 n. 7 (11th Cir.1994) (holding that arguments raised for the
first time in reply brief are not properly before the court). We will afford the Secretary the same
deference that we would apply if she had not invoked the privilege.
NationsBank and amici curiae also argue that the Secretary's position in this litigation is
inconsistent with her most recent pronouncement on the relevant issues and, therefore, it does not
8
The deliberative process privilege "protects the internal decisionmaking processes of the
executive branch in order to safeguard the quality of agency decisions." Nadler v. United States
Dept. of Justice, 955 F.2d 1479, 1490 (11th Cir.1992).
14
deserve deference. However, after reviewing the relevant documents, we find no inconsistency
between the Secretary's positions in this litigation and any of her other pronouncements on the
relevant issues. According to the documents cited by both parties, the Secretary has consistently
maintained that the fiduciary responsibility of managing unallocated ESOP shares resides with the
trustee, not with the plan participants. See Polaroid letter at 3, reprinted in 16 Pens. & Ben. Rep.
(BNA) at 390; Lanoff letter at 3, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2250. She is entitled
to deference on that view. The Secretary also has consistently taken the position that a trustee may
follow participants' directions regarding those shares only insofar as the directions are prudent, in
accordance with the plan, and not contrary to ERISA.9 Polaroid letter at 3, reprinted in 16 Pens. &
9
The Lanoff letter stated the Secretary's position with respect to unallocated shares as follows:
... [T]o the extent the plan provisions instruct the trustee to pass through
decisions regarding tender offers and/or proxy voting to the plan participants, a
plan trustee may follow such plan provisions only to the extent permitted by
section 404(a)(1)(D) of ERISA....
The existence of a plan provision purporting to require that a trustee
follow a particular course of action—in this case participant directions with
respect to a tender offer or a proxy vote—does not diminish the extent of the
trustee's duty to diligently investigate and evaluate the merits of the course of
action required by the plan document to determine that the instructions are
consistent with titles I and IV [of ERISA].
Id. at 3-4, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2250-51.
There is one difference between the Secretary's earlier pronouncements and the
Lanoff letter, but it is does not diminish the weight we give to the Secretary's view.
Previously, the Secretary had said trustees may follow participants' instructions on voting
or tendering unless those instructions are imprudent, contrary to the plan, or contrary to
ERISA. See Polaroid letter at 3, reprinted in 16 Pens. & Ben. Rep. (BNA) 390. In the
Lanoff letter, the Secretary said the trustee must follow such directions unless the trustee
"can articulate well-founded reasons why doing so would give rise to a violation of titles
I or IV ..., for example, the prudence requirements of title I." See Lanoff letter at 4,
reprinted in 22 Pens. & Ben. Rep. (BNA) at 2250-51.
If the Secretary had sued NationsBank for not following plan provisions that were
prudent and lawful, then the shift in the Secretary's position (from a trustee may follow
prudent and lawful instructions to a trustee must follow prudent and lawful instructions)
would be relevant to this case. However, that is not the dispute in this case, and we reject
NationsBank's argument that the Lanoff letter diminishes the weight of the Secretary's
position in this case.
15
Ben. Rep. (BNA) at 390; Lanoff letter at 4, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2250-51.
Furthermore, the Secretary has consistently maintained that the trustee of an ESOP always retains
fiduciary responsibility for voting allocated non-voted shares. See Letter from the Department of
Labor to John Welch, Latham & Watkins (April 30, 1984), reprinted in 11 Pens. & Ben. Rep.
(BNA) 633 (May 7, 1984); Lanoff letter at 4, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2251.
We will defer to the Secretary's judgment on those points, if we conclude that her positions are
reasonable.
D. ANALYSIS: THE UNALLOCATED SHARES
1. Whether Polaroid ESOP Participants Are Named Fiduciaries
The Secretary contends that ESOP participants are not and cannot be named fiduciaries with
regard to unallocated shares, because they can never satisfy ERISA's definition of named fiduciaries
with regard to those shares. In the alternative, the Secretary argues more narrowly that as to the
unallocated shares the Polaroid ESOP participants did not meet the definition of named fiduciaries
during the Polaroid tender offer battle, because the tender notice did not inform them of their power
and control over the unallocated shares.
The Secretary's more narrow position is not espoused consistently in pre-litigation position
papers, and, therefore, it is not entitled to deference. Nevertheless, without deciding the broader
definitional question, we hold that the Secretary's more narrow position is correct, which is to say
it coincides with our own view.
In ERISA, a "named fiduciary" is defined as:
a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified
in the plan, is identified as a fiduciary (A) by a person who is an employer or employee
organization with respect to the plan or (B) by such an employer and such an employee
organization acting jointly.
29 U.S.C.A. § 1102(a)(2) (West 1985). According to this definition, a person may not be a named
fiduciary in a given situation unless: (1) he meets ERISA's definition of a fiduciary and (2) he is
identified as a fiduciary, either in the plan or through a procedure described in the plan.
16
The Secretary contends, and we agree, that the Polaroid ESOP participants did not meet the
definition of fiduciaries during the Polaroid tender battle. As we have mentioned previously, ERISA
specifies that:
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary
authority or discretionary control respecting management of such plan or exercises any
authority or control respecting management or disposition of its assets, (ii) he renders
investment advice for a fee ..., or (iii) he has any discretionary authority or discretionary
responsibility in the administration of such plan.
29 U.S.C.A. § 1002(21)(A) (West Supp.1997). The plain language of the definition clearly states
that a person is not a fiduciary unless he either has discretion or exercises authority or control with
respect to plan assets. If a person does not have discretion or exercise authority or control in a given
situation, he does not meet the definition of a fiduciary.
NationsBank contends that the Polaroid ESOP participants had the discretion to vote the
ESOP's unallocated shares and that they exercised control through their votes. Therefore,
NationsBank claims, the participants were fiduciaries during the tender offer battle and they could
satisfy the definition of named fiduciaries with regard to the unallocated shares. NationsBank argues
that the participants, and not NationsBank, had the responsibility for determining how the
unallocated shares should be voted.
The Secretary responds that the Polaroid ESOP participants could not satisfy the definition
of fiduciaries, because whatever control they had over the unallocated shares was unknown to them.
Because the participants were not fiduciaries, the Secretary argues, they could not meet the
definition of named fiduciaries, either. In the Secretary's view, NationsBank remained ultimately
responsible for determining the voting of the unallocated shares.
We conclude that the language of ERISA supports the Secretary's position. As we
mentioned above, a fiduciary must have discretion to decide the disposition of plan assets or must
exercise authority or control over plan assets. The term "discretion" means the "power of free
decision or choice" or "individual judgment." Webster's Third New International Dictionary 647
(1986). In order to have the power of decision or choice, a person must know that he can decide an
17
issue and be aware of the choices he has. A person cannot exercise the power of choice or
individual judgment unless he is aware of his ability to do so. To "exercise" is to "make effective
in action," id. at 795, and a person must have knowledge of his authority or power to control in order
to exercise control. In order for a fiduciary to exercise discretion, the fiduciary must engage in
conscious decisionmaking or knowledgeable control over assets. Based on the plain language of
ERISA, ESOP participants are not fiduciaries when they do not knowingly decide how assets will
be managed. Or, restated in the terms of this case, ESOP participants are not fiduciaries with regard
to unallocated shares when they are not given notice that their action or inaction with regard to their
allocated shares will control the disposition of the unallocated shares.
This rule makes sense, given the responsibilities that go along with being an ERISA
fiduciary. In enacting ERISA, one of Congress' primary goals was to devise a system whereby plan
participants and beneficiaries could hold fiduciaries accountable for their obligations:
It is hereby declared to be the policy of this chapter to protect interstate commerce and the
interests of participants in employee benefit plans and their beneficiaries, by ... establishing
standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans,
and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
29 U.S.C.A. § 1001(b) (West 1985); see also Lowen v. Tower Asset Mgt., Inc., 829 F.2d 1209, 1218
(2d Cir.1987) ("ERISA was deliberately structured so that legal responsibility for management of
ERISA plans would be clearly located."). Named fiduciaries and all other fiduciaries are subject to
the strict fiduciary standards in 29 U.S.C. § 1104, and they may be sued for breaching those
standards. See 29 U.S.C. § 1109 (fiduciary may be held liable for breaching any duty imposed upon
fiduciaries by ERISA); see also IIA Scott on Trusts § 185 (4th ed.1987) (stating that if the holder
of the power to direct a trustee is a fiduciary, the holder is subject to liability for the exercise or
nonexercise of that power). If ERISA did not limit the definition of fiduciaries to those with
knowledge of their authority and discretion, then persons or entities could become subject to
fiduciary liability without notice. Such a result would not only be unfair, but it would also disserve
a core purpose of ERISA, which is to create a system whereby accountable fiduciaries are motivated
by their accountability to protect the interests of participants in ERISA plans.
18
We note that Congress considered the implications of fiduciary liability for participants in
a context that is similar to the situation before us, and in that context Congress devised a result that
is markedly different than the one NationsBank proposes here. 29 U.S.C. § 1104(c)(1) addresses
fiduciary responsibility and liability in plans that provide for individual participant accounts and
which give participants a range of investments from which to choose. See 29 C.F.R. § 2550.404c-1
(1996). In that subsection, Congress acknowledged that such plans may give participants control
over their own accounts. See 29 U.S.C. § 1104(c)(1). If those plans so provide, the trustee is free
from liability arising out of participants' decisions over their accounts. See id. § 1104(c)(1)(B). The
subsection further specifies that such participants will not be deemed fiduciaries as a result of
exercising control over their own accounts. See id. § 1104(c)(1)(A). Judging from § 1104(c)(1),
Congress wanted to prevent participants from being saddled with ERISA liability when they exercise
control only over their own allocated assets. That is entirely consistent with ESOP participants not
being liable for exercise of control over their own allocated shares, at least not liable beyond the loss
of value to those very shares.
Yet, NationsBank asks us to go beyond that and read into ERISA a shift from itself to plan
participants of the liability for managing the unallocated assets held by the ESOP. We should do
that, NationsBank says, because there is no provision in ERISA that differentiates between allocated
and unallocated shares or that expressly prohibits participants from being named fiduciaries.10
We think it is enough distinction that making participants named fiduciaries with regard to
unallocated shares, at least where they do not knowingly exercise control over those shares, violates
congressional intent as demonstrated in ERISA's definitions of fiduciaries and named fiduciaries.
10
We note that if the Secretary had taken the position that participants may not be named
fiduciaries with regard to allocated voted shares, her position might be in conflict with the tax
code. 26 U.S.C. § 409(e) requires that ESOPs either give participants pass-through voting of
allocated shares or lose the tax benefits Congress created for ESOPs. The Secretary's position
that participants may be named fiduciaries with regard to allocated shares appears to be an
attempt to keep ERISA law and tax law consistent. However, NationsBank has not suggested
that the Polaroid ESOP participants must be named fiduciaries with regard to unallocated shares
in order for tax law and ERISA to be consistent.
19
Furthermore, 29 U.S.C. § 1104(c), which addresses a situation analogous to the one in this case,
indicates congressional approval of participant control over allocated assets, but shows no approval
of participant control over unallocated assets.
Congress may have considered the strikingly different situations presented by giving
participants control over their allocated shares versus control over unallocated shares. When
participants vote or tender their allocated shares, their decisions affect their own accounts, rather
than the unallocated assets of the plan. With allocated shares the person injured by a participant's
imprudent decision is that participant. By contrast, if participants are given the ultimate control over
unallocated shares, their imprudent decisions affect the interests not only of themselves but also the
interests of their co-participants. If many participants acted imprudently, or merely neglected to
respond, under a plan containing a mirror voting provision, the unallocated share pool could suffer
significant losses. One participant might lose part of the value of his stake in the unallocated share
pool due to another participant's imprudent decision or non-decision.
Moreover, insofar as participants are named fiduciaries with regard to their own shares, the
risk of liability they face is minimal. Participants will not sue themselves for making imprudent
decisions regarding their own shares. In effect, the Secretary's position that participants may be
named fiduciaries with regard to allocated shares treats participants like normal shareholders, whose
liability for acting imprudently is limited to the loss of their own shares.
By contrast, if participants are named fiduciaries with regard to unallocated shares, as a result
of their actions they may face risks of liability extending beyond loss of value in their own shares.
NationsBank has pointed to nothing in ERISA that would bar co-participants, the ESOP itself, or
the Secretary from suing participants when they make imprudent decisions with regard to
unallocated shares. We find NationsBank's position to be unacceptable, at least where participants
20
are not adequately informed of the responsibilities they possess and the liability that could go hand
in hand with those responsibilities.11
Here, the participants were not given sufficient notice of the fact that their votes would
control the unallocated shares. The only evidence in the record indicating any knowledge on the
part of the Polaroid participants that their votes would control the unallocated shares is an affidavit
of a Polaroid employee representative, which states that many employee participants were told of
the mirror voting provision. From that affidavit, we cannot tell whether all of the participants were
given notice at any time regarding how the mirror voting provision works. More importantly, we
know that the Polaroid ESOP participants definitely were not told about the mirror voting provision
in the materials NationsBank sent the participants in connection with the tender offer. That written
notice stated that each participant could "indicate your instructions regarding Shares and associated
Rights credited to your account in the ESOP," and that if the participant failed to do so, that failure
would be treated as an instruction not to tender his allocated shares. The written notice is
conspicuous for its failure to mention anything about the unallocated shares.
The implication of the notice NationsBank sent to the Polaroid participants is that they
controlled only their allocated shares. Indeed, NationsBank itself understood, at the time of the
tender offer votes, that its Trust Policy Committee had the final say on how the unallocated shares
would be voted, and that the Committee had the duty to pick a prudent option for the participants.
At the Trust Policy Committee meeting on March 20, 1989, the Committee noted that its conduct
was governed by 29 U.S.C. § 1104 and ERISA forbade it, as trustee, from following plan provisions
on voting if such provisions led to an imprudent result. The Committee believed that it had a
fiduciary obligation to independently determine whether each tender option was prudent for the
ESOP, and it in fact conducted a prudence analysis with regard to each option. The invisible
11
Because ESOP participants could conceivably face liability to other persons and entities if
they were named fiduciaries with regard to unallocated shares, we are not sure that such status
could be forced upon participants even with sufficient notice. A plan might be required to give
participants a chance to opt-out from such responsibilities and liabilities. However, we need not
and do not decide that matter.
21
premise of NationsBank's argument that the participants knowingly exercised discretion and control
over those unallocated shares is that the participants understood the plan and ERISA better than
NationsBank did at the time. We suspect that NationsBank's implicit modesty is less anchored in
sincerity than it is driven by the situational winds of this litigation.
We hold that under the circumstances of this case, the Polaroid ESOP participants could not
meet the definitional standard for an ERISA fiduciary with regard to the unallocated shares.
Furthermore, because no person can be a named fiduciary under ERISA without first satisfying the
definition of a fiduciary, the Polaroid ESOP participants were not named fiduciaries, either.12 Thus,
we conclude that the Secretary's position on unallocated shares is a persuasive one, at least in the
circumstances where notice sent the participants concerning the tender offer failed to inform them
of the effect their action or inaction would have on the unallocated shares.13
2. The Proper Standard to Apply to NationsBank's Conduct
Since Polaroid ESOP participants are not named fiduciaries with regard to unallocated
shares, 29 U.S.C. § 1103(a)(1) and its directed trustee standard do not govern NationsBank's conduct
with regard to the tendering of those shares. Instead, NationsBank retained the exclusive fiduciary
authority to manage those shares, and its conduct with regard to those shares is governed by the
fiduciary standards in 29 U.S.C. § 1104(a)(1). According to § 1104(a)(1)(D), NationsBank was
12
Because the Polaroid ESOP participants do not meet the definition of fiduciaries with regard
to unallocated shares and, for that reason, they do not meet the definition of named fiduciaries
with regard to those shares, we need not address whether the Polaroid ESOP participants are
sufficiently identified as fiduciaries in the plan to meet the second part of the definition of named
fiduciaries. See 29 U.S.C. § 1102(a)(2) (defining named fiduciary as a fiduciary who is
identified as a fiduciary in the plan).
13
The Secretary argued yet another reason why ERISA prohibits participants from being
named fiduciaries with regard to unallocated shares. The Secretary contends that present
participants have a conflict of interest with future participants and, for that reason, present
participants may not make decisions affecting future participants. The district court relied in part
on this ground in denying NationsBank's motion for summary judgment. However, we need not
and do not decide in this case whether present plan participants have a conflict of interest with
future plan participants. That the Polaroid ESOP participants were not told about their control
over the unallocated shares at the time they were given the tender offer choices is enough to
decide the issue involving those shares in this appeal.
22
obligated to determine whether the plan provisions regarding the voting of unallocated shares were
contrary to ERISA. See id. NationsBank also was required to determine whether it was prudent to
tender the unallocated shares, and if so, to whom, see 29 U.S.C. § 1104(a)(1)(B), and it had the duty
to act solely in the interest of the plan participants, see id. § 1104(a)(1).
a. Contrary to ERISA
We agree with NationsBank that a provision instructing a trustee to vote unallocated shares
in the same proportion as participants vote their allocated shares is not per se contrary to ERISA.
The Secretary has not contended otherwise; she has taken the position that a trustee should follow
a mirror voting provision unless doing so leads to a violation of § 1104(a)(1), e.g., an imprudent
result.14 See Lanoff letter at 4, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2251. We do not find
fault with NationsBank merely for attempting to comply with the mirror voting provision.
b. The Prudence of NationsBank's Conduct
However, NationsBank could not follow the ESOP's mirror voting provision blindly if the
participants' votes led to an imprudent result. See 29 U.S.C.A. § 1104(a)(1)(D) (West Supp.1997)
(providing that trustee must act prudently and "in accordance with the documents and instruments
governing the plan insofar as such documents and instruments are consistent with [ERISA] ")
(emphasis added); Central States Pension Fund v. Central Transport, Inc., 472 U.S. 559, 568, 105
S.Ct. 2833, 2839, 86 L.Ed.2d 447 (1985) ("[T]rust documents cannot excuse trustees from their
duties under ERISA."); Ershick v. Greb X-Ray Co., 705 F.Supp. 1482, 1487 (D.Kan.1989) (holding
that ESOP trustee was required to follow plan document only to extent such actions were consistent
with ERISA; if following plan document caused imprudent result, trustee would violate §
1104(a)(1)(D)); Utilcorp United Inc. v. Kemper Fin. Serv., 741 F.Supp. 1363, 1365-66
(W.D.Mo.1989) (holding that adherance to plan document provisions not sufficient to satisfy ERISA
14
Further support for concluding that mirror voting provisions are not contrary to ERISA is
found in the tax code. Congress has conditioned tax benefits for plans holding non-registered
securities on the inclusion of a mirror voting provision. See 26 U.S.C. § 409(e)(5). That tax
provision does not cover the Polaroid ESOP, because this plan holds registered securities.
Nevertheless, it indicates congressional approval of mirror voting in some instances.
23
duty of prudence); cf. DeBruyne v. Equitable Life Assurance Soc'y, 920 F.2d 457, 464-65 (7th
Cir.1990) (analyzing prudence of investment action "regardless of whether it comported with
[alleged plan documents]"); Central Trust Co. v. American Avents Corp., 771 F.Supp. 871, 874-76
(S.D.Ohio 1989) (holding that "[p]ass-through voting of allocated shares is not improper per se, but
is inappropriate when the exercise thereof conflicts with the fiduciary obligations imposed by
ERISA") (citation omitted). If NationsBank determined, or should have determined, that the
allocated share votes as dictated by the mirror voting provision were imprudent, then NationsBank
was required to ignore that provision and vote the unallocated shares prudently notwithstanding it.15
We will not decide the fact-laden issue of whether NationsBank acted prudently in following
the mirror voting provision, because the district court held that genuine issues of fact existed
precluding summary judgment on that question. We will remand the case to the district court for
determination of those factual issues and a resulting decision on the prudence question.
c. Whether NationsBank Acted Solely in the Interest of Participants
The district court did not address the issue of whether NationsBank acted solely in the
interest of participants, as required by 29 U.S.C. § 1104(a)(1), other than to hold that genuine issues
of fact exist on that question. NationsBank does not contend otherwise on appeal, and we leave it
to the district court to resolve that dispute.
E. ANALYSIS: THE ALLOCATED NON-VOTED SHARES.
We now turn to the question of whether plan participants may be named fiduciaries with
regard to allocated non-voted shares held by an ESOP. The Secretary claims, and the district court
agreed, that NationsBank violated ERISA by not tendering the allocated non-voted shares held by
15
NationsBank argues that an ERISA trustee must follow a plan provision unless it is facially
invalid, or unless following the provision would be an abuse of the trustee's discretion. We
disagree, at least where plan participants are not sufficiently informed to be named fiduciaries.
In such a situation, ERISA dictates that a mirror voting provision that leads to an imprudent
result is invalid as applied. Therefore, the trustee must disregard the provision, just like it would
have to disregard any other plan provision controlling the disposition of plan assets which leads
to an imprudent result. See 29 U.S.C. § 1104(a)(1) (providing that a fiduciary must act in the
manner a prudent man would act in managing plan assets).
24
the Polaroid ESOP to Polaroid. The Secretary contends that: ESOP participants may not be named
fiduciaries with regard to allocated non-voted shares; NationsBank was not a directed trustee with
regard to those shares; and NationsBank could not rely upon the plan's provisions regarding those
shares to avoid liability when those provisions led to an imprudent result. The Secretary has
repeatedly and consistently pronounced the view that participants may not be named fiduciaries with
regard to allocated non-voted shares. We owe it considerable deference and will uphold it if it is
reasonable.
The Secretary makes both a textual argument and a policy argument to support her position
that plan participants may not be named fiduciaries with regard to allocated non-voted shares. For
her textual argument, the Secretary cites ERISA's requirement that a named fiduciary control a
directed trustee via "proper directions ". See 29 U.S.C.A. § 1103(a)(1) (West 1985) (emphasis
added). According to the Secretary, directions are explicit responses only, and mere non-responses
do not constitute directions to a trustee. For her policy argument, the Secretary contends that it
violates ERISA's purposes to allow participants to be named fiduciaries in circumstances where they
failed to return directions.
We conclude that the Secretary's interpretation of ERISA with regard to the allocated
non-voted shares is unreasonable. Participants may be named fiduciaries with regard to allocated
voted shares—as the Secretary has conceded—because participants have the discretion to decide
or the ability to control how those shares should be voted. See 29 U.S.C. § 1002(21) (defining a
fiduciary as a person who has discretionary authority over plan assets or who exercises control over
plan assets). Participants have control over the allocated shares in their accounts. Participants do
not lose control over their shares merely by failing to respond to a tender request, at least not when
they are specifically told in the notice that such a response will be treated as a direction not to tender.
Contrary to what the Secretary contends, a participant's informed failure to respond to a tender
request is an exercise of control or discretion.
25
The Secretary's position that the term "directions" requires explicit responses is
unreasonably strict. Directions include "guidance or supervision of action, conduct or operation."
Webster's Third New International Dictionary 640 (1986). If the trustee informs participants of their
choices, and participants are reminded at the time of decision how the trustee will treat
non-responses to the trustee's request, then non-responses suffice as guidance, or directions, for the
trustee. Indeed, the black letter law of trusts requires the trustee to follow the participants' silent
directions, if the plan so provides:
where by the terms of the trust it is provided that the trustee shall not do certain acts without
the direction or consent of another, it is ordinarily his duty not to do such acts without such
direction or consent.
Restatement (Second) of Trusts § 185 cmt. b (1959).
As a matter of policy, the Secretary claims that NationsBank could not have known why
participants failed to return explicit directions and, for that reason, it should have exercised its
independent judgment on the prudence of tendering those shares. We reject the Secretary's
argument, because it is inconsistent with the Secretary's position that participants may be named
fiduciaries with regard to allocated voted shares. If the Secretary views participants as sufficiently
knowledgeable and accountable to bear the fiduciary responsibility of voting and tendering allocated
voted shares, then there is no reason to treat them as uninformed and irresponsible when they do not
explicitly respond to a tender offer after being told specifically how a non-response will be treated.
We reiterate that in order for non-responses to satisfy the definition of directions, the trustee must
provide participants with sufficient information regarding their options at the time it requests
directions, and participants must be told at that time how the trustee will treat non-responses. So
long as those requirements are met, there is no reason to presume that participants do not know what
they are doing when they fail to respond.
In sum, the Secretary's position regarding allocated non-voted shares is unreasonable. Even
when the Polaroid ESOP participants failed to respond explicitly to NationsBank's tender request
regarding their allocated shares, the participants were named fiduciaries who controlled
26
NationsBank's conduct pursuant to § 1103(a)(1). NationsBank's conduct with regard to those shares
was not governed by § 1104(a)(1), and NationsBank was not required to exercise its independent
judgment in deciding how and whether to tender those shares. It only had to make sure the
participants' directions were proper, in accordance with the terms of the plan, and not contrary to
ERISA. See 29 U.S.C. § 1103(a)(1).
The Secretary does not argue that the Polaroid ESOP participants' directions with regard to
allocated non-voted shares were not in accordance with the plan or that those directions were
contrary to ERISA. She does argue, however, that participants could not give "proper directions,"
because they were not given adequate information about the tender options and the last-minute
developments taking place before the voting deadline. We leave it up to the district court to decide
in the first instance if the notice was adequate in those respects. In deciding that question, the
district court should apply the standard for proper directions that the Secretary has consistently
espoused, and which both parties cite in this appeal. The Secretary has explained that directions
received from participants are proper if:
[the trustee] follows procedures to assure that the eligible individual account plan's
provisions are fairly implemented, that the participants have not been subjected to coercion
or undue pressure in making their decisions, that necessary information is provided to the
participants, [and] that clearly false information or misleading information is not distributed
to the participants....
Lanoff letter at 3, reprinted in 22 Pens. & Ben. Rep. (BNA) at 2250.
IV. CONCLUSION
At least where ESOP participants are not informed at the time of a tender offer of a plan's
mirror voting provision and the control the participants possess over the plan's unallocated shares,
such participants are not "named fiduciaries" within the meaning of ERISA with regard to the
unallocated shares. The Polaroid ESOP participants were not informed of the mirror voting
provision in their plan at the time they voted. Therefore, they could not be named fiduciaries with
regard to unallocated shares at the time of the Polaroid tender offer battle, and NationsBank was not
a directed trustee with regard to those shares. We agree with the Secretary that NationsBank had
27
the duty to determine how those shares could be voted prudently, and it was required to override the
plan's mirror voting provision if necessary to achieve a prudent result. NationsBank also was
required to act solely in the interest of participants in voting the unallocated shares.
Contrary to what the Secretary contends, however, the Polaroid ESOP participants could be
named fiduciaries with regard to the allocated non-voted ESOP shares. The Secretary has conceded
that ESOP participants may be named fiduciaries with regard to allocated voted shares, and they
may control a directed trustee if given proper directions. We conclude that the Secretary's position
that participants' "directions" must be explicit is unreasonable, at least where the participants are
fully informed at the time that a failure to respond will be treated as a "no" vote. Without deciding
whether the directions in this case were completely "proper," we hold that a failure to respond may
under certain circumstances constitute a "direction[ ]."
Based on these conclusions, we AFFIRM in part and REVERSE in part the district court's
order denying both parties' motions for summary judgment. We REMAND the case for the district
court to decide: (1) whether NationsBank acted prudently or imprudently in failing to tender to the
Polaroid tender offer the unallocated shares held by the plan; (2) whether NationsBank acted solely
in the interest of participants in failing to tender the unallocated shares; (3) whether the instructions
given to the plan participants with regard to allocated non-voted shares were proper; and (4) any
other issues necessary to decide this case in a manner not inconsistent with this opinion.
28