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Legal review of employee benefit plan issues represents a key
opportunity for private equity funds to protect and enhance the
value of their investments. Below are some important
considerations to bear in mind when structuring and negotiating
transactions.
Potential Areas of Non-Compliance
Dealing with historical benefit plan non-compliance can be
costly and distracting to a new management team. An effective
review of a target company's employee benefit plans can foster
a successful execution of a fund's business plan by reducing
ongoing risks, saving costs, helping to ensure a smooth transition
for employees, and better positioning portfolio companies for
future add-on acquisitions and the private equity fund's
eventual exit.
Potential Areas of Joint and Several
Liability
Certain employee benefit plans carry unfunded liabilities that
are joint and several liabilities of the sponsoring employee or
participating employer and each member of that employer's
"controlled group." The controlled group generally
consists of all entities, whether or not incorporated, that are
connected through common ownership of 80 percent or more by vote or
value. Under some theories, the entire private equity fund
and its portfolio companies may be deemed to be part of the
controlled group and thus jointly and severally liable for such
liabilities.
Single-Employer Plans
Single-employer defined benefit pension plans often carry
significant unfunded termination liabilities that can adversely
affect the plan sponsor's balance sheet. Private equity
funds should be cautious of rules that impose joint and several
liabilities for unfunded termination liabilities and annual minimum
funding contributions among members of the controlled
group.
Multi-Employer Plans A private equity fund acquiring a direct or indirect interest
in 80 percent or more of the target may be liable for any
withdrawal liability or missed contributions. Many U.S.
multi-employer defined benefit pension plans assess significant
liabilities against employers that cease participation in such
plans (referred to as "withdrawal liability"). A
key consideration for multi-employer plans is identifying and
managing potential (and often significant) withdrawal liabilities
in due diligence. In addition, multi-employer defined benefit
pension plan liabilities can be deemed to be joint and several
liabilities of the entire controlled group. Further, in an
asset transaction, withdrawal liability is automatically triggered
and assessed on the seller and its controlled group. Private
equity buyers should be aware that sellers sometimes may seek to
shift such burdens to the buyer in the purchase agreement.
Positioning for the Future – Structuring the
Post-Acquisition Entity
The definitive purchase agreement should contain provisions to
manage the benefit plan obligations of the private equity fund and
its target. After closing, acquisition targets typically must
establish and administer new employee benefit plans. This is
particularly relevant in carve-out scenarios where the target had
been participating in the employee benefit plans of a much larger
parent company. Proper documentation and corporate governance
is key to ensuring compliance with relevant rules and
regulations. In particular, sellers often seek to require
that buyers replicate current employee benefit plans at the
seller. However, a replication of such plans may not make
business sense for the size and cash flow of the target. In
the welfare area, the most costly plans to establish are retiree
welfare benefit plans. In the pension area, typically defined
contribution, rather than defined benefit, plans are
established.
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.
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Issues After The Election
