In any acquisition, whether for shares or assets, employee benefits and obligations must be taken into account. One of the potentially most onerous obligations includes the provision of pension benefits to employees – this makes it all the more important for companies contemplating acquisitions to consider potential employee pension plan implications.
In a share purchase context, the buyer will typically assume all liabilities of the target company, and if the target company has a pension plan in place, this will often be included. However, if there are significant pension fund deficits, this may be one reason an asset purchase agreement is more desirable. With an asset purchase agreement, the pension plan is not automatically transferred to the new company. An asset purchase allows companies to come up with creative options for addressing pension plan considerations. The options include closing plans, merging plans, moving employees to different plans, or changing the formula by which benefits are provided.
Further, the nature of the pension plan will likely impact the scope of the liability. Defined benefit plans, have a fixed formula in place that depends on an employee’s length of service and salary at retirement. Based on this formula, a benefit is guaranteed on retirement. On the other hand, in a defined contribution plan, the benefit at retirement is dependent on the contributions deposited during the employee’s working years, whether made by the employer alone or by both the employer and the employee. For this reason, a defined contribution plan imposes less of a liability upon acquisition. These guidelines may be further complicated by any legislative obligations, regulatory obligations, collective agreement obligations, or individual contract of employment obligations for pension benefits that the buyer is assuming.
These liabilities need to be taken into account when pricing companies. These can be difficult calculations to undertake because they are dependent on a complex combination of economic and demographic factors. Actuarial methods can vary from employer to employer therefore if the actuarial approach of the target company is more stringent than the actuarial approach of the buyer, the buyer may want to use their own approach to gain a more accurate sense on the ongoing long-term financial implications.
Although onerous, careful due diligence is critically important to avoid problems down the road. Of particular interest may be plan documents, pension fund liabilities and assets, and actuarial reports. Finally, due to the scope of the undertaking, it is useful to keep in mind that pension plan changes may take time to set in that extend long after the closing of the transaction.
The author would like to thank Jessica Silverman, summer student, for her assistance in preparing this legal update.
Stay informed on M&A developments and subscribe to our blog today.
