Donovan v. Bierwirth

In the fall of 1981, LTV Corporation attempted a hostile takeover of the Grumman Corporation. Grumman’s board of directors unanimously adopted a resolution to oppose LTV’s tender offer, and John Bierwirth, chairman of Grumman’s board, sent a letter to the company’s shareholders requesting their help in defeating the offer. Bierwirth’s letter argued that the price offered by LTV of $45 per share was inadequate and that LTV’s pension fund was severely underfunded. Bierwirth, Robert Freese, and Carl Paladino (trustees) (defendants) were the trustees of the Grumman Corporation Pension Plan (plan). Freese was also a Grumman officer, and Paladino was an officer of a Grumman affiliate. The trustees voted not to tender the plan’s Grumman shares and decided to purchase additional Grumman stock on behalf of the plan up to the limit of 10 percent of the plan’s assets permitted under the Employee Retirement Income Security Act of 1974 (ERISA). The plan purchased 958,000 shares at an average price of $38.61 and an additional 200,000 shares at an average price of $36.62, for a total cost of $44.3 million. Before LTV’s tender offer, Grumman’s stock had been trading at approximately $24–$27 per share. In a separate action, the LTV offer was temporarily enjoined, drastically reducing its chances for success and causing the price of Grumman’s common stock to drop. The value of the plan’s newly purchased shares fell to $32.5 million. The United States secretary of labor, Raymond Donovan (plaintiff), brought an action against the trustees, arguing that they breached fiduciary duties owed to the plan’s participants under ERISA. The district court preliminarily enjoined the trustees from buying, selling, or exercising any rights with respect to Grumman securities, and the trustees appealed.