Corporate transactions in general have been hard hit by the credit crunch and activity levels have been low. While it may still be early to talk of "green shoots" we see indications of a change in sentiment which may lead to increased M&A transactions- in addition to transactions by companies eager to try to strengthen their position by selling off non core businesses, and sales by insolvency practitioners. We thought a few reminders of the pension issues which can arise for both buyers and sellers where there is a defined benefit scheme might be useful.
- Buyers tend nowadays to prefer a deal structure which allows them to take on the business without any legacy pension liabilityfor example buying assets rather than shares; or where there are other reasons to buy shares in a company, leaving the pension scheme, and any liability attaching to it, behind. Where the target company leaves a group wide scheme, this triggers a debt to the scheme under the Pensions Act 1995; this can normally be dealt with in the sale contract by an undertaking by the seller to assume that liability. But where the seller is financially shaky, the buyer may not be happy relying on a simple indemnity and the deal may therefore have to include some kind of escrow mechanism, or be conditional on reaching a formal solution from a menu of options permitted by legislation since April 2008. However, the new options will inevitably require the involvement of the scheme trustees, and in some cases the Pensions Regulator, inevitably taking more time (and incurring more cost).
- Buyers from insolvency practitioners need also to be cautious, particularly where the deal has been agreed before the formal insolvency process begins, as a so called "pre-pack". In the case of a management buy out where the existing management retain control or ownership of part of the new business, and the pension scheme is left behind, there may be some exposure for the investor unless clearance from the Pensions Regulator is obtained. In practice the price for this clearance will include a percentage of the shares in the new entity being held by the Pension Protection Fund. This equity stake must be taken into account in agreeing the ownership structure and any deferred consideration arrangements.
- Sellers must not overlook that the sale of a subsidiary or its business may trigger a debt to the scheme and so accelerate the obligation to fund part of the existing pension scheme deficit. While there are ways of mitigating this, implementing a solution may take time, in particular in negotiation with the trustees, but preventive action to take advantage of the relatively new "period of grace" provisions will be needed immediately.
Note also that the debt provisions can be triggered where there is no sale to a third party but only an internal reorganisation, perhaps for tax purposes: the Government is consulting on possible relaxations to the employer debt regime for such cases but any actual legislation is still some way off.