What influence do pension scheme trustees have on a proposed Takeover of a sponsoring employer ("Target Company")?

Where the Target Company's shares are listed on the London Stock Exchange the Takeover Code (the "Code") applies. The main purpose of the Code is to protect the Target Company's shareholders from unfair treatment. In the case of listed and unlisted companies, trustees may have other leverage.

In its consultation earlier this year (21 March 2011) the Takeover Panel (the body responsible for administering the Code) canvassed views on obliging the bidder to engage with employee representatives as "persons affected" by a bid. The Takeover Panel received many representations from pension scheme trustee boards that trustees should also be included as "persons affected". The main rationale behind this request being the impact takeovers may have on the security of scheme members' benefits and the actions scheme trustees may take which may affect company finances and hence the overall value of companies to their shareholders.

The Takeover Panel in its response to the consultation (published on 21 July 2011) did not agree. The new edition of the Takeover Code published on 19 September 2011 includes "employee representatives" as persons affected by a bid but not pension scheme trustees.

However, all is by no means lost – pension scheme trustees may well have leverage in other ways and whether or not the Target Company is listed or unlisted. For instance:

  1. The Target Company and scheme trustees will have entered into various binding agreements e.g. re scheme funding including, in some cases, contingent asset arrangements and pledges not to grant security or further security. Bidders will almost certainly prefer to avoid possible actions for inducing breaches of contract. Bidders will therefore be encouraged to work with pension scheme trustees rather than against them;
  2. In the absence of a clearance application by the bidder or the Target Company, the Pensions Regulator ("tPR") may still be persuaded to assist pension scheme trustees by supporting trustees intervention;
  3. If bidder does apply to tPR for clearance, scheme trustees will be notified and will be able to make their views known, backed up by such powers as are available to them under the scheme trust deed and rules and tPR's moral hazard powers; and
  4. Where the bid involves a "scheme of arrangement" by which the High Court authorises corporate restructuring (which may be part of the Takeover process) pension scheme trustees are likely to be one of the parties to the Court application. Indeed, we understand that in recent High Court proceedings although the pension scheme trustees (having received covenant advice) supported the Takeover, scheme members objected and, unusually, the High Court agreed to hear the members' views.

All in all, Takeovers are a difficult area for trustees and market practice continues to develop in this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.