Recent Decision May Impact Pension Asset Transfers On Mergers And Acquisitions

By Sean Weir, Maria Doerksen, François Morin, Bernie Roach, Andrew Harrison and Debra Sing, Q.C.

The Court’s Decision

On December 16, 2005, the Ontario Superior Court of Justice released its decision in Burke v. Hudson’s Bay Company,¹ regarding pension plan asset transfers on mergers and acquisitions. If upheld on appeal, the Burke decision will have significant implications for all companies administering plans in Ontario.

The details of the case are discussed below. We draw the following implications, for plan sponsors, administrators, and purchasers / vendors in the asset transfer context.

The Burke decision appears to stand for the following:

When a pension plan subject to a trust in favour of members and former members is split, whether in the context of a sale or plan restructuring, surplus existing at the time must be divided between the original plan and the plan to which members and former members are being transferred.

• It appears that assets proportionate to liabilities must be transferred when a pension fund is split between two plans. One issue not addressed in Burke is whether this would also apply in cases where a pension plan is in a deficit position at the time of the split.

• The fact of regulatory approval of an asset transfer is no defence to an action on the part of transferred employees.

• Similarly, the fact that both the vendor and purchaser in a purchase and sale transaction agreed that no surplus (or an amount greater or less than a proportionate share) would be transferred is no defence to plan member claims.

• It is not yet known how regulators will respond to the Burke decision, but it is possible that they will refuse to approve asset transfers that are not proportionate to liabilities, unless and until the Burke decision is overturned on appeal. In the past, the Financial Services Commission of Ontario has decided whether to approve asset transfers based upon whether the company would be entitled to surplus on plan wind up.

• Since the decision, currently under appeal, is based upon trust law principles and not upon statutory provisions, it will apply to any plan in Ontario, whether registered with the provincial or federal regulator. The decision will likely also be influential on courts in the other common law provinces.

In order to understand the potential impact of the Burke decision, the administrator of a pension plan that has been affected by, or is contemplating, an asset transfer should, with the aid of legal counsel:

• In the case of an .exporting. pension plan, review all current and historical documents that created the "exporting" plan, to determine whether the plan is subject to a trust in favour of the members. If the plan is not subject to a trust, or is subject to a trust but contains validly enacted terms specifically addressing asset transfers that have been complied with, the Burke decision will not apply.

• Determine whether there was actuarial surplus in the .exporting. plan at the time of the transfer and, if so, whether a proportionate share of any such surplus was transferred. If there was no actuarial surplus, or if a proportionate share was transferred, the Burke decision may be of limited impact.

• Review the contractual documents related to any purchase and sale that resulted in an asset transfer, to determine what, if any, indemnities the vendor may have given. In some cases, the purchase and sale agreement entered into between vendor and purchaser may require the purchaser to indemnify the vendor, if the vendor is required to transfer surplus to the purchaser.s pension plan.

While it may be relevant to a party’s internal restructuring of its pension arrangements, the Burke decision will have the greatest impact in the context of purchase and sale transactions in which pension assets were transferred from the vendor’s plan to the purchaser’s plan. What steps a plan administrator should take in response to the decision will depend upon whether they were a vendor or purchaser.

• Completed Transactions. In the case of a completed transaction, the vendor.s options are limited. If former plan members sue the vendor, it should seek legal advice as to whether it can claim an indemnity from the purchaser, either under the terms of the agreement of purchase and sale, or under equitable principles such as unjust enrichment.

• Pending Transactions. In the case of a pending transaction, if the relevant agreement requires the purchaser to indemnify the vendor only if regulatory approval of the asset transfer is denied, the vendor should consider whether it can renegotiate its agreement with the purchaser. Otherwise, the vendor runs the risk that the regulator may approve the transaction, thereby potentially precluding the vendor from relying on the purchaser’s indemnity if the affected employees later sue the vendor. If the relevant agreement contains no indemnity at all, the vendor should also consider whether it can renegotiate its agreement with the purchaser.

• Future Transactions. In any future transactions, the vendor should ensure that the agreements with the purchaser address the possibility that an asset amount other than that agreed to between the parties may have to be transferred, either as a result of regulatory action or civil litigation. The vendor should then either obtain an appropriately worded indemnity from the purchaser, or seek an adjustment to the purchase price to reflect the additional risk the vendor is accepting, and the additional value that the purchaser will receive.

• Completed Transactions. Since the Burke decision is based on breach of trust law obligations owed to members, it does not give a purchaser the right to sue the vendor with respect to the non-transfer of surplus. Unless the vendor has breached the terms of the purchase and sale agreement, the purchaser will have no remedy. If the transferred employees choose to sue the vendor, the vendor may have to transfer additional money to the purchaser’s pension plan. Whether this will ultimately benefit the purchaser will depend upon whether the purchaser is required to indemnify the vendor, either under the terms of the purchase and sale agreements, or under equitable principles of unjust enrichment.

• Pending Transactions. As noted above, depending upon the contractual arrangements between vendor and purchaser, a vendor may be reluctant to close a pending transaction as a result of the Burke decision. In such a case, the purchaser should consider whether it can compel the vendor to complete the transaction, or whether it should, instead, renegotiate the transaction to take into account the Burke decision (and the outcome of any appeal therefrom) in such a way that the purchaser will still want to complete the transaction.

• Future Transactions. In any future transactions, the purchaser will have to determine what, if any, indemnity it will be willing to give to the vendor to address the possibility that the vendor may be forced to transfer an asset amount different from that agreed. If the purchaser gives an indemnity, it will have to decide how the indemnity should be factored into the purchase price.

Burke is a representative action brought on behalf of former employees of the Hudson Bay Company.s ("HBC") Northern Stores Division ("Division"). In 1987, HBC sold the Division to the North West Company ("NWC"), which in turn set up a pension plan ("NWC Plan") virtually identical to HBC’s plan ("HBC Plan"). Assets equal to the liabilities associated with the affected employees were transferred over to the NWC Plan. The .appropriate regulators. had approved the pension aspects of the sale.

The plaintiffs alleged that prior to the transfer, HBC had improperly taken contribution holidays and charged expenses to the HBC plan. The Court dismissed these claims.

The plaintiffs’ more significant argument was that HBC breached duties owed to them, because none of the surplus that existed in the HBC Plan at the time of the 1987 sale was transferred to the NWC Plan. The Court accepted this argument, holding that the HBC Plan was subject to a trust in favour of its members and former members. The transfer of assets without a pro rata portion of the surplus, in Campbell J..s view, resulted in an inequitable split of trust assets between the HBC and NWC Plans, constituting a breach of trust. Pension assets were intended to provide benefits to both groups of employees, so the employees transferred to the NWC Plans were deprived of the benefit of assets that could have been used not only to pay their basic benefits, but also to provide benefit enhancements.

The Court did not immediately decide how to fix the problem. The parties were asked for further submissions as to how much money the HBC Plan should be required to pay into the NWC Plan. However, the Court’s reasons contemplate that the amount should be determined by calculating a share of HBC Plan assets as at the date of the 1987 transfer proportionate to the liabilities represented by the transferred employees. This amount might then be adjusted to take into account foregone benefit enhancements as well as the fact that NWC could have taken contribution holidays and charged administrative expenses against any surplus that was transferred at the time of the sale.

The reasoning in the Burke decision would seem to apply to any defined benefit pension plan in which the assets are held in a trust, even if surplus would ultimately be payable to the employer on a full wind up of the plan. As such, it may be viewed by some employers as another disincentive to maintaining a defined benefit pension plan.

F Footnotes

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.