BENEFITS IN ACQUISITION
due diligence involves uncovering and examining all of a Seller's
benefit plans in order to determine their compliance with law and
potential financial impact on the Buyer.
The due diligence process begins with the Buyer's request for
information from the Seller, typically following a confidentiality
agreement or a letter of intent.
In the case of due diligence for benefits purposes, the
information request should start with a listing by the Seller of all
of its employee benefit plans.
Included will be all "plans" as we typically think of
them as well as informal, unwritten arrangements that some employers
may maintain for vacation or bonus arrangements.
This request should cover all retirement plans including:
purchase pension plans
stock ownership plans, or "ESOPs"
employer (union) pension plans.
Benefits due diligence should also include a request from the Buyer
for the Seller to list all of its welfare benefit plans including:
death and dismemberment plans
plans (premium only and "flexible spending account" plans)
term disability plans
(union) welfare plans.
Seller should also be asked to list its deferred compensation and
incentive compensation arrangements, including:
option plans (nonqualified and incentive stock option plans)
employee retirement plans
benefit plans (for example, an educational assistance plan or
transportation expense reimbursement plan)
considering a Seller's benefits, vacation pay plans, severance pay
plans, deferred compensation plans and the like, potential
liabilities and accounting disclosure issues may be presented.
For example, GAAP accounting requires the accrual of
liabilities for earned but unpaid vacation and deferred
obvious are other benefit related liabilities that can be so large
that, if they are disclosed, they may require adjustment of the
purchase price the Buyer is willing to pay.
These liabilities include:
Benefit Pension Plans
Multiemployer Pension Plans
Plans of other members of Seller's controlled group or
affiliated service group.
potential of large liabilities associated with underfunded defined
benefit pension plans and multiemployer pension plans means that
even if you have entered into a letter of intent, it is unlikely
that the parties will really have agreed on the purchase price if
such a liability arises in due diligence.
The Buyer will be unwilling to assume all of it by taking
over the Seller's plan, and the Seller will be unwilling to assume
all of it by terminating or withdrawing from the plan prior to
closing. Because of the
potentially disruptive nature of this kind of liability, it makes
sense to flesh it out as early as possible in the acquisition
process. One way to do
that is to insert a Seller representation into the letter of intent
that, in effect, states that the Seller has no unfunded pension
the following language:
Seller nor any member of a controlled group of corporations,
businesses under common control or an affiliated service group which
includes Seller maintains or contributes to a defined benefit
pension plan as defined in Section 3(2) of ERISA, 29 U.S.C. '1000 et
seq., or a multiemployer pension plan as defined by the
Multi-Employer Pension Plan Amendments Act of 1980, 29 U.S.C. '1381 et
second stage of due diligence, after all of the Seller's plans have
been identified, is to request appropriate supplemental information.
The purpose of doing so is (1) to establish that the plans
are properly documented and in compliance with all legal
requirements, and (2) to quantify any associated liabilities.
Once these issues have been resolved, the liabilities can be
allocated between Buyer and Seller.
documents that you should be looking at in this second stage of
benefits due diligence include, for defined benefit plans, the most
recent actuarial reports, and for multiemployer pension plans, a
statement from the plan administrator of the estimated withdrawal
liability that would be incurred in the event of a current
documents that should be reviewed include all plan documents, trust
agreements, agreements with third party administrators, summary plan
descriptions, annual reports (Form 5500), COBRA notices, HIPAA
certificates, all correspondence with the IRS, DOL or Pension
Benefit Guaranty Corporation, any employer records concerning
disputed benefit claims, and a copy of the Seller's employee
you get your hands on all of this material, what should you be
Seller liabilities (this could be anything from liability for
accrued vacation to COBRA continuation coverage)
regulatory audits or inquiries
contested benefit claim
out on disability and not carried on Seller's employment rolls
points you should be aware of in considering benefits issues in an
Make sure that any Seller group health insurance contracts
that the Buyer wants to leave in place is assignable and, if not,
find out what the insurance carrier requires in order to waive any
restrictions on assignment. Also,
a Buyer should check with any existing group carrier for its
existing health insurance for contract restrictions on covering
the newly acquired business with a separate policy from another
carrier. Try to
determine the health risks covered under the Seller's plan.
Employees-to-be with significant health problems may cause
serious cost increases if these risks are absorbed into the
Self-insured medical plans - make sure existing stop loss
insurance covers all benefits provided under the plan.
Plan Termination Issues -
Market Value Adjustments
Termination to avoid ERISA liabilities
Buyer issues if Seller discontinues its business and leaves
no mechanism in place to handle plan termination and benefit
Seller may not be able to terminate a DB plan unless it's
Severance plans -- are they welfare plans or pension plans?
An ERISA compliance issue is presented if the Seller's
severance plans do not meet welfare plan criteria, including:
all benefits must be payable to the participant within 24
months of termination of employment; and
total benefits may not exceed the equivalent of twice the
participant's annual compensation during the year preceding
termination of employment.
Union employees -- a Seller who is going out of existence or
disposing of a union plant or facility probably is operating under
an existing collective bargaining agreement.
Under the labor laws, a Buyer may be deemed to have successor
liability under that agreement even in an asset transaction.
This could tie a Buyer into the existing collective
bargaining agreement as well as related obligations to make pension
and welfare contributions. Remember,
the rules under the labor laws are less restrictive than the general
commercial rules that would attach Seller liabilities to Buyers
under the successor liability rules.
No continuity of ownership or management is necessary.
So union contracts have to be approached more cautiously than
other Seller contracts.
Retirement Plan Mergers
No full vesting of benefits
No distributions to Seller's employees
Continuity of plan through Buyer's plan
Minimum Coverage and Transaction Rules
Golan & Christie LLP
70 West Madison St.
Chicago, Illinois 60602