This blog is the first of a series of articles concerning pensions in the case of mergers and acquisitions. In this blogging series we will be considering the following, amongst other things:
- the relevance of literature research into pension entitlements and liabilities;
- the legal regime governing pensions in the case of mergers and acquisitions based on various scenarios;
- the transfer of outstanding contributions where applicable;
- the administration of a pension plan following a merger or acquisition.
We will end this blogging series with various practical tips and points for consideration in relation to pensions.
Relevance of literature research
It is important to both the buyer and the seller that they are aware of the underlying position when exploring the potential for a merger or acquisition. This certainly also applies in the case of pensions. The questions which these parties would need to clarify for themselves, include the following, amongst others:
- What pension liabilities will you acquire or not? Are there ways to avoid this?
- Have all staff been registered appropriately and on time?
- What pension arrangements have been made with staff and have they always been implemented accordingly?
- Are any unforeseen pension claims pending?
- How far-reaching are the financial liabilities based on the pension arrangements which have been made?
- How can the pension risks remain manageable?
It is important to ask these questions, because pension liabilities may contain ‘hidden’ debts. As a result, a buyer may pay too much for a business, because not all of its pension risks have been revealed. Alternatively, a buyer may adopt an inappropriate approach towards a pension administrator with all the financial consequences which this may have without being aware of its impact at the time and without devoting sufficient attention to it in the acquisition contract in the form of, for example, warranty and guarantee provisions.
It is precisely during negotiations that a seller can strengthen their position if they have complied with all of their obligations. Alternatively, where they have not been complied with, a construction may be found which will enable the organisation to ensure that its pension risks remain manageable. In this case it is usually important that a construction be found and implemented before the actual merger or acquisition occurs.
Potential sticking points may also be discovered with the aid of literature research. For example, where a seller is mandatorily affiliated to an industry pension fund but the buyer is not, this may give rise to administrative difficulties. Such a situation was recently brought before the Amsterdam Court of Appeal, which ultimately ruled that the buyer should have arranged a similar type of pension plan for the relevant employees. For this reason the buyer had to pay all of the pension contributions with retrospective effect and no small amount was involved.
Amsterdam Court of Appeal
The judgment handed down by the Amsterdam Court of Appeal shows just how important it is to identify the risks and implications of pensions before a merger or acquisition occurs. The rest of this blogging series will consider situations such as the one before the Amsterdam Court of Appeal in greater detail and how they may be avoided!