## Facts

- LTV Corporation made a hostile tender offer to acquire a controlling stake in Grumman Corporation at $45 per share.
- The Grumman Corporation Pension Plan held about 525,000 shares of Grumman stock acquired in the mid-1970s.
- Grumman’s board and senior management opposed the tender offer; two plan trustees were also key Grumman insiders involved in opposing the offer.
- The plan trustees (Bierwirth, Freese, and Paladino) chose not to tender the plan’s shares and instead directed the plan to buy additional Grumman stock up to ERISA’s 10% limit for employer securities.
- The plan purchased about 1,158,000 additional shares at an average price around $38.27 per share, spending roughly $44.3 million and materially increasing plan exposure to Grumman equity.
- After the tender offer’s prospects weakened, Grumman’s market price declined, reducing the value of the plan’s newly acquired shares.
- The Secretary of Labor alleged the trustees acted to further management’s anti-takeover objectives rather than solely in participants’ interests.
- The district court preliminarily enjoined the trustees from trading or exercising rights in Grumman securities for the plan and appointed an independent investment manager to control those holdings pending litigation.

## Issues

1. Whether the Secretary showed a sufficient likelihood that the trustees violated ERISA § 404(a) duties of loyalty and prudence (and potentially ERISA § 406(b) conflict-of-interest prohibitions) by refusing to tender and purchasing additional employer stock during a corporate control contest.
2. Whether the district court properly granted preliminary injunctive relief and installed an independent investment manager over the plan’s Grumman holdings to protect plan assets during the case.

## Decision

- The Second Circuit largely affirmed the preliminary injunction restricting the trustees’ control over the plan’s Grumman securities.
- The court held the Secretary made a strong preliminary showing that the trustees’ conflicted conduct likely breached ERISA’s loyalty and prudence duties.
- The court approved appointment of an independent investment manager as an appropriate interim measure to ensure decisions about the plan’s Grumman holdings were made by a fiduciary free of disabling conflicts.
- The court indicated the order could require tailoring and remanded for further proceedings consistent with its opinion.

## Legal Principles

- ERISA fiduciaries must act solely in the interest of plan participants and beneficiaries and with the care, skill, prudence, and diligence of a prudent person under similar circumstances.
- When fiduciaries hold dual roles as corporate insiders and plan fiduciaries in a takeover contest, they must recognize the conflict and take steps to neutralize it, including obtaining independent advice; in some situations, suspension or resignation from fiduciary service may be required.
- ERISA does not categorically bar insiders from serving as fiduciaries or categorically forbid decisions opposing a tender offer; liability turns on whether the fiduciary decision-making process and outcome reflect loyalty to participants rather than corporate management aims.
- Courts may use equitable remedies, including preliminary injunctions and interim transfer of investment discretion to an independent manager, to prevent further harm to plan assets while merits litigation proceeds.

## Conclusion

The Second Circuit upheld interim restrictions and independent management of plan holdings where plan trustees who were also corporate insiders increased the plan’s investment in employer stock during a hostile tender offer, and the Secretary showed a substantial likelihood that conflicted decision-making breached ERISA’s duties of loyalty and prudence.


Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982)