3.7.2.5 ERISA

A fairly new source of liability risk for outside directors (since 2000) is the Employment Retirement Income Security Act (ERISA). ERISA class action suits resemble securities class actions, but are brought on behalf of employees whose retirement plans include company shares. These plans can be either employee stock ownership plans (ESOP5), whose principal purpose is to invest in company shares, or self-directed defined contribution 401(k) plans, for which an investment in company shares is an option. If the shares were purchased while the company's market price was inflated by improper disclosures, the employees can attempt to show that the outside directors were ERISA fiduciaries, that they failed to adequately supervise the plan, and that they should therefore be liable for employee losses when shares later decline in value. Outside directors have a realistic opportunity to succeed in a motion to dismiss if plaintiffs cannot show that the outside directors were ERISA fiduciaries and/or cannot make a prima facie showing negligence by the outside directors.1