Tatum v. R.J. Reynolds Tobacco Co.

• Decision Date: 25 February 2013
• Docket Number: No. 1:02CV00373.,1:02CV00373.
• Citation: 926 F.Supp.2d 648
• Parties: Richard G. TATUM, individually and on behalf of a class of all other persons similarly situated, Plaintiff, v. R.J. REYNOLDS TOBACCO COMPANY, et al., Defendant.
• Court: U.S. District Court — Middle District of North Carolina

926 F.Supp.2d 648

Richard G. TATUM, individually and on behalf of a class of all other persons similarly situated, Plaintiff,

v.R.J. REYNOLDS TOBACCO COMPANY, et al., Defendant.

No. 1:02CV00373.

United States District Court, M.D. North Carolina.

Feb. 25, 2013.

Bill Lann Lee, Jeffrey Lewis, Catha A. Worthman, Lewis Feinberg Lee Renaker & Jackson, P.C., Oakland, CA, J. Griffin Morgan, Robert M. Elliot, Helen L. Parsonage, Elliot Pishko Morgan, P.A., Winston–Salem, NC, James M. Fingerg, Daniel M. Hutchinson, Kelly M. Dermody, Lieff, Cabraser, Heimann & Bernstein, LLP, San Francisco, CA, for Plaintiff.

Daniel R. Taylor, Jr., Adam H. Charnes, Tonya R. Deem, Chad D. Hansen, James J. Hefferan, Kilpatrick Townsend & Stockton LLP, Winston–Salem, NC, for Defendant.

MEMORANDUM OPINION

NORWOOD CARLTON TILLEY JR., Senior District Judge.

This case involves the unwinding of what has been described as “one of the biggest mergers and most fought-over leveraged buyouts of the 1980's, a battle that became a symbol of the decade's excesses”—the 1986 merger of R.J. Reynolds Tobacco and Nabisco. Ironically, the merger was “intended to enhance the tobacco company's increasingly negative image.” ¹ Fourteen years later, R.J. Reynolds and Nabisco separated because of the negative impact of tobacco litigation on Nabisco's stock prices. The subject of this litigation is the retirement plan created for R.J. Reynolds Tobacco as a result of the spin-off of R.J. Reynolds from Nabisco.

Plaintiff Richard Tatum was an employee of R.J. Reynolds Tobacco (“RJR Tobacco”), before and after the spin-off. A bench trial was held in this case from January 13, 2010 to February 9, 2010 on Mr. Tatum's claim that Defendants R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc. (collectively, “RJR”) breached their fiduciary duties in managing the RJR Tobacco Capital Investment Plan (“the Plan”) in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001 et seq.

Mr. Tatum brought this case on behalf of himself and a class of over 3,500 employees and retirees of RJR who had invested in the Plan and whose investments were moved out of Nabisco stocks shortly after the RJR Nabisco food and tobacco companies separated in June 1999. This Memorandum Opinion states the Court's findings of fact and conclusions of law after receiving the evidence at trial and considering the arguments of counsel. For the reasons outlined below, it is determined that fiduciary duties of procedural prudence were breached when those in charge of the investment decision decided to remove and sell Nabisco stock from the Plan without undertaking a proper investigation into the prudence of doing so; however, it is further determined that the decision to remove the stock, under the circumstances of this case, is one which a reasonable and prudent fiduciary could have made after performing such an investigation.

I. FINDINGS OF FACT

A. The Parties and the Class

Mr. Tatum brought this certified class action in May 2002, on behalf of all participants in the R.J. Reynolds Tobacco Company Capital Investment Plan (“Tobacco Plan”) whose individual accounts held Nabisco stocks (shares of Nabisco Group Holdings (“NGH”) common stock and/or Nabisco (“NA”) common stock) at any time from June 14, 1999 through January 31, 2000. Dock. # 209, at 5.

The Class is represented by Mr. Tatum, who was employed at R.J. Reynolds Tobacco Company from July 1977 until he retired on August 1, 2007. Immediately prior to his retirement, Mr. Tatum served in the position of Lead Systems Analyst. 1/13/10 Tr. at 7:22–24, 8:9–23 (Tatum) (Dock. # 372). At all times pertinent to this action, Mr. Tatum has been a participant in the Plan. During the class period, portions of the Plan accounts of Mr. Tatum and the other class members were allocated to the Nabisco stock funds (“Nabisco Funds”). ²

The defendants in this case are R.J. Reynolds Tobacco Company (“RJRT” or “RJR Tobacco”) and R.J. Reynolds Tobacco Holdings, Inc. (“RJRTH”). As further explained infra, RJRTH (now Reynolds American) is the successor in interest to pre-spinoff RJR Nabisco, Inc. R.J. Reynolds Tobacco Company (RJRT) is a wholly owned subsidiary of Reynolds American, Inc. (formerly RJRTH at the time of the spin-off). DX–173 at RJR11642.

B. The Spin-off

In early March 1999, RJR Nabisco, Inc. decided to separate the company's food business, Nabisco (NA), and tobacco business, R.J. Reynolds Tobacco Company (RJRT), through a spin-off of the tobacco business to shareholders of the holding company, RJR Nabisco Holdings.

At the time, RJR Nabisco Holdings owned 100 percent of RJR Nabisco, Inc. (“RJR Nabisco”). RJR Nabisco had two operating subsidiaries. RJR Nabisco owned 100 percent of R.J. Reynolds Tobacco Company (RJRT), the second-largest tobacco company in the United States. RJRT's stock was not publicly traded. RJR Nabisco also owned 80.5 percent of Nabisco (NA), one of the nation's top snack food and bakery products companies. The remaining 19.5% of NA was owned by public stockholders and traded on the New York Stock exchange.

To accomplish the spin-off, the RJR Nabisco Holdings Board of Directors did the following: (1) the shares of Nabisco (NA) held by RJR Nabisco were conveyed up to the holding company, RJR Nabisco Holdings, which would be renamed Nabisco Group Holdings (NGH); and (2) RJR Nabisco, now holding shares only of RJR Tobacco, would be renamed RJR Tobacco Holdings (RJRTH), and its shares would be distributed by dividend to the shareholders of the entity formerly known as RJR Nabisco Holdings and to be known as NGH. 1/14/10 Tr. at 80:21–81:10 (Gordon) (Dock. # 377); DX–208. The RJR Nabisco Holdings shareholders would receive one share of RJRTH for every three shares of RJR Nabisco Holdings. DX–24, DX–13 at RJR001598.

As a result of the spin-off, where an RJR Nabisco Holdings shareholder previously owned one share of RJR Nabisco Holdings—which included both the food and tobacco businesses—the shareholder, following the spin-off, would own two stocks—stock of a food business (NGH) and a second stock of the tobacco business (RJRTH). DX–9 at RJR000257; DX–13 at RJR001599. Ownership of NA stock was not affected.

1. Rationale Behind the Spin-off

The May 19, 1999 public information statement filed with the U.S. Securities and Exchange Commission (“SEC”) by RJR Tobacco Holdings, described the “primary purposes of the distribution”:

• each of the food and tobacco businesses will be better able to respond to the opportunities and challenges in its industry and thereby achieve its full potential under separate ownership;

• management of each business will be able to focus solely on that business;

• RJR will be able to align management's incentives more closely with stockholder's interests;

• the companies will achieve substantial costs savings; and

• investors and financial markets will be better able to understand and evaluate the food business and the tobacco business.

DX–13 at RJR001588; 1/21/10 Tr. at 190:16–191:19 (Angowitz) (Dock. # 381).

The May 19, 1999 public information statement further explained that, in deciding to move forward with the spin-off, management considered that:

-[T]he food and tobacco businesses are large, complex businesses with different challenges, strategies and means of doing business and that, under a separate ownership structure, each business will be better able to respond to the opportunities and challenges in its industry and thereby achieve its full potential.

-[T]he separation will result in two distinct publicly traded equity securities that will enable financial markets to better understand and evaluate the food and tobacco businesses.

DX–13 at RJR001599; 1/21/10 Tr. at 191:20–192:10 (Angowitz).

While neither party has suggested that the public statements regarding the reason for the spin-off were not accurate, employees from RJR and Nabisco testified at trial that it was widely believed the shareholder value of Nabisco would be enhanced after the split because the value of Nabisco's stocks was being unnecessarily depressed by investors' fears regarding ongoing litigation against tobacco companies. See 1/20/10 Tr. at 173:1–174:6 (Schindier) (Dock. # 380); 1/13 10 Tr. at 187:4–10 (Suozzi (Video)) (Dock. # 372); 1/22/10 Tr. at 27:10–15 (Angowitz) (Dock. # 382); 1/25/10 Tr. at 37:20–38:4 (Johnston) (Dock. # 383). The discount on the Nabisco stocks as a result of the tobacco litigation was known as the “tobacco taint.” See, e.g., 1/14/10 Tr. at 22:19–23, 132:11–13 (Gordon) (Dock. # 372); 1/22/10 Tr. at 170: 18–21 (Angowitz) (Dock. # 382).

2. Tax Consequences of the Spin-off

The spin-off transaction was structured to comply with a section of the tax code that allowed for a tax-free spin-off transaction (with no tax consequences to RJR Nabisco or RJR Nabisco Holdings/NGH shareholders resulting from the spin-off of the shares of the domestic tobacco company to the shareholders of RJR Nabisco) provided the spin-off was not part of a larger sales transaction. Tax code regulations allowed a presumption that there was no larger transaction if two years had passed from the time of the spin-off until a further event or sale occurred. 1/21/10 Tr. at 185:21–186:18 (Angowitz) (Dock. # 381); 26 U.S.C. § 355(e); 26 C.F.R. § 1.355–7 (2010). If NGH initiated any corporate restructuring or a sale within two years, the spin-off transaction could lose its tax-free status. Members of senior management at RJR Nabisco Holdings were aware of the tax consequences of the spin-off and had discussions about those consequences. 1/21/10 Tr. at 186:19–187:3 (Angowitz) (Dock. # 381).

C. The Tobacco Plan³

As a result of the spin-off, the RJR Nabisco Plan was divided into two separate plans, one for NA and one for RJRT. RJRT retained the old pre-spin RJR Nabisco Plan, while a new plan was created for employees of NA. 1/19/10 Tr. at 132:6–14 (Cissna) (Dock. # 379). The spin-off created two...