Key Issues
- Defined benefit (DB) pension liabilities can go to the heart of deal negotiations as they can impact the purchase price.
- Specific provisions are often included in transaction documentation to govern how such liabilities will be calculated to adjust the purchase price.
- It is important to document the correct methodology for valuing liabilities and assets (if any). This can require specifying different accounting bases for different jurisdictions.
- Which plans and liabilities will transfer and what are the cost implications?
- Ensure there is a provision restricting material change to pension provision between sign and close.
- Consider the approach to pension liabilities and assets which do not automatically transfer.
- Will transferring plans be integrated with any existing plans post close?
- Can existing plans be utilized or are new ones needed?
- Who is responsible for establishing any new plans? Who will bear the cost?
- Understand the extent to which pension provision can be changed when setting up new arrangements - this will vary by jurisdiction.
- Timing considerations - plans will need to be in place from day 1. TSAs for benefits/pensions cannot be utilized in every jurisdiction and consultation requirements may be triggered.
- Setting up non-pension benefits for a carved-out business can give rise to operational and legal issues.
- The first step is to establish which plans/benefits are target-specific, and so will transfer across, and which are group-wide, meaning that a replacement plan will need to be set up.
- Can all benefits be replicated? Is offering alternative benefits consistent with the deal principles in the sale agreement, the terms of employment contracts and/or any collective agreements?
- What information and consultation obligations will the new plans and/or benefit changes trigger?
- The timing and operational challenges of the benefits workstream should not be underestimated.
- Particular attention must be paid to retiree medical/health benefits. Like DB pensions, these can impact price.
Pensions heatmap
- Significant new powers aimed at protecting DB pensions including new criminal offences (unlimited fine/7 years imprisonment), greater power to impose liability on other group companies (up to buy-out deficit) and fines of up to GBP 1 million.
- Pensions higher up Board's agenda and pension scheme trustees involved at earlier stage.
- Transferring employees’ DB plans and respective liabilities automatically transfer on an automatic employment transfer.
- However, pension-related assets (e.g., under a Contractual Trust Arrangement and/or re-insurances) do not automatically transfer. The mechanism for transferring assets will need to be considered in each case.
- Employees in certain industries are required to be members of industry-wide pension plans. The buyer will want to establish whether any transferring employees are eligible for membership of such plans and seek appropriate protection in the sale agreement against the risk of non-compliance.
- The buyer will also need to consider whether the transaction will bring any transferring and/or existing employees within the scope of such plans.
Case studies: pensions and benefits advice
- High profile demerger of a GBP 48 billion global consumer healthcare joint venture, involving in the region of 100 jurisdictions.
- Advising a Fortune 500 company in a USD 11 billion deal, setting up a new joint venture to support the rapid growth of digitization in the power generation industry.
- Advising a French multinational company that designs, develops and manufactures electrical systems, devices and equipment on the sale of part of its business in a EUR 1.66 billion deal.
- Counsel for a global investment company in connection with a USD 4.3 billion investment deal in a multinational cosmetics and beauty company.