Home > ESOPs > Articles Online > ESOP Forum >

The Polaroid Case Settles

David Johanson

June 1999

The Final Chapter in the Polaroid Case? NationsBank and U.S. Department of Labor Settle Long-Time Litigation Regarding Allegations of Fiduciary Responsibilities for Tendering Company Stock in 1988 Takeover Bid.

It is a gross understatement to indicate here that it is noteworthy that NationsBank of Georgia, N.A. ("NationsBank") agreed with the U.S. Department of Labor (DOL) on May 17, 1999, to distribute approximately $5 million in cash and stock to participants in the Polaroid Employee Stock Ownership Plan (the "Polaroid ESOP") in order to settle the DOL's seven-year old lawsuit challenging a NationsBank predecessor's handling of a 1988 takeover bid while it served as institutional trustee for the Polaroid ESOP. In Herman v. NationsBank of Georgia, N.A., the U.S. District Court for the Northern District of Georgia approved the settlement agreement by entering a consent order.

The underlying lawsuit between NationsBank and the DOL came about as a result of competing tender offers for Polaroid that occurred in 1988. Shamrock Acquisitions III, Inc. ("Shamrock") initially made a tender offer to Polaroid's shareholders for their stock. Polaroid formed the Polaroid ESOP at the time, partly in response to Shamrock's tender offer. Polaroid also made a more lucrative self-tender for its stock. NationsBank's predecessor (the "Trustee") then mailed to all Polaroid ESOP participants a description of the competing tender offers and instructed the participants to direct the Trustee to (1) tender to Polaroid, (2) tender to Shamrock, or (3) not tender at all. The Trustee advised the Polaroid ESOP participants that non-responses would be treated as directions not to tender (according to the Polaroid ESOP plan document) but did not advise them that unallocated (suspense account) Polaroid stock would be tendered in the same proportion as the Trustee was directed to tender allocated Polaroid stock, also as provided in the Polaroid ESOP plan document.

As the Trustee was evaluating whether and how to tender the Polaroid stock, the DOL sent the Trustee an unsolicited letter (reprinted on March 6, 1989) advising the Trustee how the DOL interpreted the Trustee's fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, as amended (ERISA), in handling the competing tender offers. The DOL's advice to the Trustee essentially indicated that the Trustee was ultimately responsible for making independent decisions regarding the tendering of unallocated and allocated non-directed Polaroid stock, regardless of the Polaroid ESOP plan document provisions. The Trustee decided that any of the alternatives available to the Polaroid ESOP (as described above) would be prudent and in the best interests of the Polaroid ESOP participants. It also decided to follow the terms of the Polaroid ESOP plan document and the Polaroid ESOP participants' directions.

The DOL initially brought the lawsuit against the Trustee in 1992, alleging that the Trustee breached its fiduciary responsibilities under ERISA by failing to tender the allocated non-directed Polaroid stock and the unallocated Polaroid stock. The DOL's initial complaint also challenged the validity of an indemnification provision in the Polaroid ESOP plan document that provided that Polaroid would indemnify the Trustee for any liability incurred in handling competing tender offers if the Trustee followed the Polaroid ESOP plan document provisions regarding participants' directions. In a May 3, 1993, decision (Martin v. NationsBank of Georgia, N.A.), the U.S. District for the Northern District of Georgia invalidated the indemnification clause.

The U.S. District Court for the Northern District of Georgia later denied the parties' cross motions for summary judgment in Reich v. NationsBank of Georgia, N.A. on June 5, 1995, but the U.S. Court of Appeals for the Eleventh Circuit partially reversed that decision on appeal in Herman v. NationsBank Trust Co. on November 10, 1997, and remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings on the issue of whether the Polaroid ESOP participants properly understood the impact of their directions on the tender offer process.

During the time that the case was remanded to the U.S. District Court for the Northern District of Georgia, NationsBank and the DOL negotiated and reached the settlement agreement It requires NationsBank to allocate and distribute approximately $5 million in cash and in Polaroid stock (approximately $4 million in stock) to participants eligible to participate in the Polaroid ESOP as of April of 1989. Given the length of time that the matter has been litigated, the settlement agreement provides that "doubts about eligibility should be decided in favor of claimants to the extent reasonable and practicable." The settlement agreement also directs the settlement administrator to assist the Polaroid ESOP participants in locating appropriate records to document their eligibility to participate in the settlement proceeds. According to the settlement agreement, NationsBank must bear all of the costs of implementing its terms.

Although according to a NationsBank spokesperson with Bank of America (which recently merged with NationsBank), "[n]o findings of fact were ever made during the litigation that either NationsBank or its affiliates were negligent in the actions involving the tender," a fiduciary faced with similar circumstances to those that the Trustee experienced would be well-advised to at least consider the contents of the DOL's March 1989 advisory letter to the Trustee.

This ESOP Forum will address other aspects of the direction pass-through process in future months as it is an increasingly significant topic, given the fact that many ESOPs own controlling interests in their company sponsors and a substantial amount of major corporate events have occurred in recent years that require the direction pass-through process to take place.

Biography and list of other "ESOP Forum" installments

^^Top of Page