Canada: The Burke Decision – The Obligation To Transfer Surplus In The Context Of A Sale Of A Business And The Payment Of Plan Expenses Print Version

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits May, 2008

On May 20, 2008, the Ontario Court of Appeal released a unanimous judgment in Burke v. Hudson's Bay Company (Burke) which clarified that a transfer of surplus assets on the sale of a business was not required, at least in the circumstances where plan members did not have entitlement to surplus on a pension plan wind-up, and which clarified when it is acceptable to pay pension plan expenses from the pension fund.

Background

In 1987, Hudson's Bay Company (the Bay) sold the assets of its Northern stores division to a retail company that became the North West Company (the Sale). As part of the Sale, the North West Company promised to offer employment to all affected employees and signed a pension agreement which provided that it would establish a new pension plan to provide each transferred employee with benefits at least equal to those provided under the Bay pension plan at the time of the Sale. Under that agreement, the Bay agreed to transfer to the North West Company pension plan cash assets equal to the pension liabilities of the transferred employees. Under the terms of the agreement, following the transfer of assets, the Bay would have no further obligation or liability for the pension benefits of the transferred employees.

Following the negotiation of the agreement, there were questions raised about the appropriate quantum of assets to transfer. Ultimately, a number of the employees initiated a representative proceeding in which they sought, among other things, a declaration that the transferred employees had a legal or equitable interest in the fund and an Order that the Bay either transfer a pro rata share of the surplus to the North West Company plan or that part of the surplus be held in trust for the transferred employees. They also sought an Order requiring the Bay to pay into the fund two further sums with respect to amounts that the Bay had taken for contribution holidays between 1982 and 1986 and amounts that had been paid as expenses from the Fund between 1982 and 1986.

At trial, the trial judge held that a transfer of assets without surplus from the plan to the North West Company pension plan amounted to a breach of trust. The trial judge also found that contribution holidays an d the payment of expenses from the Fund were permitted based on the terms of the plan documentation.

The Bay appealed on the matter of surplus arguing that it had no obligation to transfer surplus from its ongoing pension plan. The respondents cross appealed asking the court to reverse the decision below which ratified the payment of expenses from the pension fund.

The Asset Sale and Transfer of Pension Assets

Was the Bay obligated to transfer some share of surplus as part of the transfer of pension assets on the sale of the business? The decision of the Court of Appeal can be summarized best by quoting from paragraph 31 of the judgment:

[31] In my view, the issue raised on the main appeal can be resolved only by first determining whether the Transferred Employees had any entitlement to surplus at the time of the Sale. If they did not, in light of the terms of the Agreement and the absence of legislation to the contrary, there could have been no obligation on the part of the Bay to transfer any portion of the Plan's actuarial surplus to the NWC Plan. If they did have such an entitlement, other questions follow before it can be decided what, if anything, must be done in respect of the actuarial surplus in the Plan at the time of Sale, particularly as the Plan was ongoing. As I explain below, in my view the Transferred Employees had no such entitlement. Thus, there is no need to address those other questions on this appeal.

In essence, the court found that, as the plan members in issue had no entitlement to surplus assets under the pension plan on a pension plan wind-up given the wording of the original plan and trust and as it was the wording of the pension plan documentation and not the conduct or expectations of the parties that was relevant, there was no obligation to transfer surplus.

The court found that, because the pension documents only promised the members a right to the defined benefits, the plan implicitly provided that surplus would be returned to the employer. Therefore, the later plan amendment to make explicit what was already implicit was permitted under the broad amendment language of the plan text and the trust agreement. It is noteworthy that the plan was amended at a time when the trust agreement did not yet restrict the use of funds for other than the exclusive benefit of members.

The court does not answer the question of what surplus is required to be transferred on a sale of business where the members are entitled to surplus on a plan wind-up. This is a significant omission as in the context of most such sales it will not be possible to complete an historical analysis to determine surplus entitlement prior to the sale. Hopefully, subsequent courts will determine that there is no obligation to transfer surplus on a sale of a business irrespective of the surplus entitlement language on plan termination, given (i) that the sale of a business where the members join a pension plan of the new employer does not result in a plan termination; and (ii) the recent Rockwell decision (Lennon v. Ontario (Superintendent of Financial Services) (2007), 2007 C.E.B. & P.G.R. 8268, 63 C.C.P.B. 245, 87 O.R. (3d) 736, 231 O.A.C. 83) in which the court held that the provisions of the Pension Benefits Act (Ontario) dealing with asset transfers only requires the Superintendent to consider the protection of benefits, not of any rights to surplus.

Fiduciary

It is interesting to note that while the trial judge in this case had referred to the Bay as a trustee, the Court of Appeal specifically states that the use of the word trustee was "a simple misstatement on the part of the judge". The Court of Appeal, however, goes on to note that "The Bay, as the Plan administrator, was a fiduciary. Had there been a legal obligation to transfer part of the surplus at the time of the Sale and had it been found that the Bay failed to cause that to occur, the proper nomenclature would have been a finding that the Bay was in breach of its fiduciary obligations to the Transferred Employees."

Even-Handed Rule

The respondents had argued that a determination not to transfer surplus would leave all of the surplus in the old trust which would put the beneficiaries of that trust in a preferred position to the beneficiaries of the new trust, and therefore breach the even-handed rule. The Court of Appeal answered by saying that the trust instrument wording can, and does in this case, displace the even-handed rule:

...While the Plan is ongoing, as I explain below, the Bay has the right to use the actuarial surplus by way of contribution holiday and it is entitled to cause all Plan and Fund expenses to be paid from the Fund. On termination, the Bay is entitled to the surplus. That is, the trust instrument displaces the even-handed requirement in respect of Plan members by means of the rights it gives to the Bay... [para. 60]

Were Expenses Properly Paid from the Fund?

The Court of Appeal in this case emphasizes again the distinction between plan and trust fund expenses. The court also summarizes its findings in the Kerry decision as follows:

[67] When the pension plan assets are held by way of trust, there are expenses that arise in the management of the trust fund. Typically, the expenses include trustee compensation, taxes and investment fees.

[68] At paras. 56 to 57 of Kerry, this court outlined the test for when expenses – either Plan administration or Fund management expenses or both – can be paid from the pension fund. As has been noted, the court must review the pension plan documentation to determine whether the matter of expenses has been addressed and:

[i]f, in the documentation, the company undertook to pay the Plan [e]xpenses, it must do so, unless that undertaking was validly amended. Absent such an undertaking, the company [i]s under no legal obligation to pay such expenses.

[69] There are no principles of law that automatically require an employer to pay plan expenses. Thus, if the pension plan documentation is silent on the matter, expenses can be paid from the plan assets. Put another way, silence does not create a legal obligation on the company to pay plan expenses.

[70] In Kerry, the pension plan text was silent on the payment of plan administration expenses. However, article 5 of the relevant trust agreement placed the obligation to pay trustee fees and expenses on the employer. Article 5 reads as follows:

5. The expenses incurred by the Trustee in the performance of its duties, including fees for expert assistants employed by the Trustee with the consent of the Company and fees of legal counsel, and such compensation to the Trustee as may be agreed upon in writing from time to time between the Company and the Trustee, and all other proper charges and disbursements of the Trustee shall be paid by the Company, and until paid shall constitute a charge upon the Fund.

[71] Based on article 5, the court confirmed in Kerry that the employer was obliged to pay the trustee fees and expenses incurred by the trustee in managing the trust fund unless and until article 5 was validly amended. However, as the employer had not undertaken to pay the expenses incurred in administering the pension plan, it was entitled to have plan administration expenses paid from the pension fund.

The court notes that in this case the plan was silent on the payment of expenses between 1961 and 1985. In 1985, the Plan indicated that all plan administration expenses were to be a charge on the Fund unless the Bay chose to pay those expenses.

The court goes on to note that the 1961 trust agreement, i.e., the original trust agreement, provides the following provision with respect to payment of expenses of the trustee:

21. The Trustee shall be entitled to such compensation as may from time to time be mutually agreed in writing with the Company. Such compensation and all other disbursements made and expenses incurred in the management of the Fund shall be paid by the Company. [emphasis added]

The court determined that, based on Article 21, the Bay was obliged to pay trustee compensation expenses incurred in the management of the fund. However, because the Bay did not undertake to pay plan administrative expenses it was entitled to have those expenses paid from the Fund.

The next trust agreement authorised the payment of Plan administration expenses and Fund expenses, apart from the trustee's remuneration, from the Fund:

7. Administration costs and expenses of or in connection with the Fund or the Plan and all taxes of any and all kinds whatsoever that may be levied or assessed under existing or future laws upon or in respect of the Fund or the income thereof shall be paid from the fund unless the Company otherwise directs. The Trustee's remuneration in respect of its services hereunder shall be paid by the Company and shall not be a charge against the Fund. Such remuneration shall be arrived at by an agreement between the Company and the Trustee independent of this Agreement. [emphasis added]

[81] As a consequence of art. 7 of the 1971 Trust Agreement, by the time the Bay began paying the Plan expenses from the Fund in 1982, it had express authority to do so, apart from the limited obligation to pay trustee remuneration.

In 1984, even the Bay's obligation to pay trustee expenses was removed. The Court of Appeal found that both the 1971 and the 1984 amendments were valid. It found that the only restrictions on amending the trust and plan were as follows: under the Plan, no amendment shall be made "which shall authorize or permit any part of the [F]und to be used for, or diverted to, purposes other than those contemplated by the Plan." The trust agreement "provided that no such amendment shall authorize or permit any part of the Fund to be used for or diverted to for purposes of those specified in the Plan." The court concluded that amendments which led to expenses being from the fund were for purposes contemplated or specified by the Plan and, therefore, valid.

The court went on to consider whether the amendments were in fact a revocation of trust and found that the payments in question were to third parties so could not constitute a partial revocation of the trust. However, the court went beyond that and found that even if this could be seen to be a revocation it could be seen to be a permitted revocation.

[89] Further, even if the payments could constitute a partial revocation of trust, there is no absolute prohibition against revocation. Revocation, in whole or in part, is acceptable if authorised by the terms of the trust agreement. When the Bay began paying Plan expenses in 1982, the trust agreement expressly authorized such payments. Thus, to the extent it could be seen to be "revoking" money that it had contributed to the Fund, it was expressly authorized to do so by the terms of the Plan documentation.

Therefore, the court determined that as a result of amendments to the plan and trust agreement all expenses including trustee fees could be paid from the trust fund.

This is a helpful case as it clarifies that even the trust agreement provisions for the payment of expenses can be amended pursuant to the amendment provision, which was suggested, but not acted upon, in the Kerry case.

It also raises the issue of whether revocation may be permitted by a broad amendment clause.

The Effect of the Employee Booklets on the Ability to Pay Plan Expenses from the Fund

The respondents argued that the Bay's ability to pay plan expenses from the pension fund were restricted because of a statement in a booklet which said that the Bay was paying for all expenses. The Court of Appeal looked at two statements in the employee booklet, which it called "disclaimers", and found on the basis of those disclaimers, that there was no representation that the employees could rely on to restrict the Bay's right to pay expenses from the fund.

The two disclaimers are common in pension plan booklets and provided as follows:

[94]...

Any such plan is bound to be complicated. This booklet is only a summary for your convenience; for detailed information on any point, you should refer to the official text of the plan, which is readily available to you on request.

[96]

... The Company expects to continue this pension plan indefinitely. But circumstances can change, and the Company has to reserve the right to modify the plan in any way, at any time.

This is a helpful explanation of how plan booklets should be drafted in order to preserve rights.

Supreme Court of Canada

We will watch to see whether the respondents in this matter seek leave from the Supreme Court of Canada to appeal the decision. This must be done by August 19, 2008.

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.