The opinion of the court was delivered by: MISHLER
Memorandum of Decision and Order
Plaintiff Raymond J. Donovan, the Secretary of Labor (the "Secretary"), brings this action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., against the three trustees of the Grumman Corporation Pension Plan (the "Pension Plan") to, inter alia, enjoin acts and practices violative of Title I of ERISA and secure other appropriate equitable relief. The gravaman of plaintiff's complaint alleges that each of the individual trustees have breached their fiduciary duties by expending Pension Plan assets for the purchase of Grumman Corporation stock in an effort to fend off the tender offer made for the Grumman Corporation ("Grumman") by the LTV Corporation. ("LTV"). The details of those open market purchases made by the Pension Plan on October 12 and 13, 1981 have been recounted in a recent decision by this court, The LTV Corporation v. Grumman Corporation, 526 F. Supp. 106 (E.D.N.Y. October 16, 1981). For the purposes of presentation, we shall once again review the details of those purchases and examine the decision-making process which led to the purchase decision.
The material facts are either conceded or beyond dispute, and accordingly, this motion did not necessitate an evidentiary hearing. The court has thoroughly reviewed the exhibits and depositions submitted at the time of argument on October 30, 1981 and now makes the following findings of fact and conclusions of law as required by Rule 52(a) of the Federal Rules of Civil Procedure.
On September 24, 1981, The LTV Corporation publicly announced that it was making a tender offer for up to 70% of the Grumman Corporation's outstanding stock and securities convertible into stock conditioned upon acquiring at least 50.01% of Grumman stock on a fully diluted basis. On the day prior to the announcement, Grumman's Chief Executive Officer and Chairman of the Board of Directors, John C. Bierwirth, was informed of LTV's intentions while vacationing on the Mississippi River. He returned to Grumman headquarters at Bethpage, New York midday on the 24th. He did not confer with Grumman personnel concerning the LTV offer until his return. The Grumman Board of Directors convened September 25 and passed a resolution to fight the takeover. Thus, the commencement of Grumman's well orchestrated plan to defeat the LTV tender offer was set into motion.
The Pension Plan held 525,000 shares of Grumman stock prior to the October purchases. The market value of that investment immediately before the tender offer (at $ 25 per share) was approximately $ 13,125,000.LTV's offer to purchase Grumman stock for $ 45 per share presented the Pension Plan with the possibility of realizing a substantial gain on its Grumman investments.
Three days after the Board's decision to oppose the LTV takeover, Mr. Bierwirth, acting as Chairman of the Board, in a letter directed to "Fellow Grummanite(s)," observed the following:
"We're very optimistic about out chances of defeating the takeover bid. About a third of all shares are held by Grumman's employee investment and pension plans. These plans are managed by Grummanites who will look long and hard at how well their fellow members would be served by selling off Grumman stock."
It was indeed the obligation of the Pension Plan trustees to take a long hard look at how the Plan would be served by tendering its Grumman stock.
Mr. Bierwirth spent approximately 90% of his working hours during the two-week period following his return to Long Island trying to understand the LTV offer and simultaneously denouncing it through public meetings with reporters, employees and retirees. His decision as a trustee of the Pension Plan to refuse the opportunity to tender was arrived at during a special meeting of the trustees on October 7. The meeting lasted somewhere between one and two hours while the discussion of whether to tender took approximately one-half hour. (Freese dep. at p.30). Other than the trustees, John Mullan, in-house counsel for Grumman, was the only other individual present at the special meeting. John Mullan had not been formally retained by the Pension Plan as counsel. The trustees failed to consult with outside counsel, or any independent investment advisor. In part, they relied on the opinion of Dillon, Read & Co., an investment banking firm retained by Grumman to render an opinion solely on the adequacy of LTV's offering price.
The other Pension Plan trustees are Robert G. Freese and Carl A. Paladino. Approximately fifty percent of Freese's time between the announcement of the tender offer and the actual Pension Plan purchases was devoted toward raising bank credit for the purchase of Grumman common stock by Grumman. Paladino's only activity between September 23 and October 7 involved the preparation of financial material concerning Grumman Aerospace, a subsidiary of Grumman. (Paladino's dep. at pp.13-16). He had neither formally nor informally, prior to the October 7 trustees' meeting discussed the possibility of a Pension Plan purchase of Grumman stock. (Paladino's dep. at pp.24-25).
The October 7 trustees' meeting commenced with a ten-minute presentation by Mr. Mullan about ERISA, (Freese dep. at pp.24-25), and culminated in a unanimous vote by the trustees not to tender the Grumman shares already owned by the Pension Plan. Further discussions led to a second decision wherein they voted to purchase up to an additional 1,275,000 shares of Grumman stock. The decision not to tender was announced in a press release on October 8, the same day on which the trustees executed an amendment to the Plan's Trust Agreement providing for indemnification of the trustees by Grumman for liability arising out of any action absent willful misconduct or lack of good faith. The amendment agreement was dated October 7.
The October 7 decision to purchase Grumman stock was conditioned upon approval by the Securities and Exchange Commission of an exemption from Rule 10b-6, 17 C.F.R. § 240.10b-6, which prohibits persons interested in a "distribution" of stock from trading in that stock. The exemption was granted on October 9. Nevertheless, no purchases were made until October 12. The trustees hoped that this court would enjoin the LTV tender offer over the following weekend thereby avoiding the Pension Plan purchases at the artificially high prices created by the tender offer, or alternatively, avoiding the purchases altogether. (See Bierwirth dep. at pp.43-44). The injunction did not issue that weekend. The trustees convened briefly on October 12 and, without further discussion on the subject, decided to proceed with their purchases.
The Pension Plan purchased 958,000 shares through Dillon, Read & Co. on October 12. The price ranged from a low of $ 36 to a high of $ 39 5/8 at an average price of $ 38.61 per share. On October 13, Dillon Read & Co. purchased an additional 200,000 shares on behalf of the Pension Plan at an average price of $ 36.62 per share.
The trustees offer essentially two theories of defense to the Secretary's claims. First, they believed that the Grumman stock represented a good investment for the Pension Plan. Secondly, they were concerned over the impact of an LTV takeover on the Pension Plan. The latter concern was twofold--that the Grumman Plan might be merged, terminated or otherwise altered to the detriment of its beneficiaries and that LTV's financial health, upon which its pension plans ultimately depend for contribution, was unsound.
In its instant motion for preliminary relief, the Secretary contends that each trustee breached his fiduciary obligation by, inter alia, (1) failing to act solely in the interest of the Pension Plan's participants and beneficiaries and for the exclusive purpose of providing benefits to its participants and beneficiaries and defraying reasonable expenses of plan administration, in violation of Section 404(a)(1)(A) of ERISA, 29 U.S.C. § 1104(a)(1)(A)
and (2) failing to act with the care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of a similar enterprise with similar objectives, in violation of Section 404(a)(1)(B) of ERISA, 29 U.S.C. § 1104(a)(1)(B).
The Pension Plan is an employee benefit plan established and maintained by Grumman. The plan is an employee benefit plan within the meaning of Section 3(3) of ERISA, 29 U.S.C. § 1002(3) and therefore subject to ERISA rules and regulations pursuant to Section 4(a) of ERISA, 29 U.S.C. § 1003(a). The Secretary of Labor has standing to maintain this action under Section 502(a)(2) and (5) of ERISA, 29 U.S.C. § 1132(a)(2) and (5). Jurisdiction and venue in this court are proper under Section 502(e)(1) and (2) of ERISA, 29 U.S.C.§ 1132(e)(1) and (2).
Each of the trustees of the Pension Plan is also an officer of Grumman or a Grumman subsidiary. John C. Bierwirth is the Chief Executive Officer and Chairman of the Board of Directors of Grumman; Robert G. Freese is a Senior Vice President and a Director of Grumman; and Carl A. Paladino is a Senior Vice President of Grumman Aerospace Corporation, a subsidiary of Grumman. Each of the trustees is a fiduciary with respect to the Pension Plan within the meaning of Section 3(21)(A) of ERISA, 29 U.S.C. § 1002(21)(A).
The alleged violations of ERISA arise from the difficult task presented to defendants during the time of the LTV tender offer of simultaneously serving two masters--Grumman and the Pension Plan. It is argued that the separate loyalties ("dual loyalties") created by their dual employment prevented the trustees from acting exclusively in the Pension Plan's interest. It is further argued that subsequent to LTV's tender offer it was per se unlawful for the plan's fiduciaries to act on its behalf because of their dual loyalties, ...