Print | Share | Reprint

Pensions ruling complicates U.K. business sales

by Laura Board | Published July 23, 2012 at 8:17 AM

Buying U.K. businesses just got harder.

A recent British High Court ruling has transformed the way would-be buyers evaluate acquisition targets, creating new uncertainties about the transfer of retirement plan liabilities from seller to buyer during business or asset sales. From oil services companies in Aberdeen to builders in Brighton, pension issues are looming larger than ever in dealmaking calculations.

Pension-scheme pitfalls in so-called share sales -- in which shareholders sell their stock in the company to the buyer -- are well documented. Such deals involving listed companies could get harder if Takeover Panel proposals that bidders come clean about plans for targets' pension schemes come to fruition.

But until the May court ruling, business, or asset, sales -- in which a company, rather than shareholders, is the seller -- were more straightforward. The seller's retirement plan liabilities were generally defined as old-age benefits that stayed with the seller under legislation designed to protect employees when businesses transfer. The ruling cleared up some gray areas from two previous European Court of Justice cases but in doing so created new doubts.

Says James Malcolm, legal director at DLA Piper UK LLP: "Every [dealmaker] will be very focused on this type of risk following this case."

Adds Duane Morris LLP partner Susan Laws: "This is exactly the sort of thing that exercises my clients when looking at acquisition targets."

The ruling arose from Svenska Cellulosa AB SCA's attempt to get £19 million ($29.4 million) sliced off the purchase price of its €512 million ($623.9 million), 2007 deal to buy Procter & Gamble Co.'s European tissues business.

The sale contract was complex. SCA had declined a so-called Beckmann indemnity, named after a 2002 case concerning the transfer of pension benefits in the event of layoffs, which would have indemnified SCA against potential liabilities. Instead, SCA, the defendant in the case, wanted a price reduction to offset the cost of early retirement benefits it claimed had passed to it from Procter & Gamble under business transfer legislation known as Tupe.

Procter & Gamble insisted that early retirement rights did not transfer, or if they did, their value was zero. P&G argued that because SCA would decide whether to allow employees to retire early, the rights might end up costing SCA nothing.

(SCA, whose law firm on the deal was Reynolds Porter Chamberlain LLP, declined to comment, as did Procter & Gamble, which turned to a Jones Day team including John Phillips and Leon Ferera.)

In his ruling, Justice Robert Hildyard clarified some issues even as he muddied others.

He confirmed that the liability for pensions payable after the normal retirement age remain with the seller. He also made clear that because a pensioner could not draw the same early retirement benefits from both the SCA and P&G schemes, and since some liabilities would remain with P&G, SCA could not be compensated twice.

But the judge also found that if an employer rather than a plan trustee decides whether an employee qualifies for early retirement, then the liability to consider that request "in good faith" transfers to the buyer, in this case SCA. The judge also determined that SCA assumed the liability for any enhancement to early retirement benefits arising from length of service.

"This case is helpful in that it says it's only the benefits up to normal retirement age that can transfer to the buyer. But it has left questions as to exactly what benefits and liabilities transfer, and there are likely to be further cases over the next 10 years," said DLA Piper's Malcolm.

He added: "Buyers will probably wait until someone brings a claim for damages, but one interpretation of the case is that they may need to put in place an arrangement to provide the non-old-age benefits."

The judgment also leaves open the thorny issue of how to value the early retirement rights that Hildyard ruled transfer over. He may give further guidance in an adjourned hearing, after which SCA may lodge an appeal. Norton Rose LLP's Lesley Browning noted the ruling fails to clarify once and for all what constitute "old-age" benefits and therefore what liability remains with the seller.

"I find it surprising that the old-age point wasn't argued," she said. "If anything there are even more unanswered questions now."

Duane Morris' Laws predicted that sellers will become less willing to give buyers' so-called Beckmann indemnities against potential liabilities.

She said bidders will have to conduct more careful due diligence about targets' pension schemes. "The challenge for us as corporate lawyers is to look at each individual scheme and look at what, if any, provisions do not relate to old-age benefits," she said.

She also suggested that buyers may become more creative in the type of acquisition structures they choose as they look to avoid taking on a seller's liabilities -- opting for liquidations, or prepack administrations, for example, instead of business sales.

Creativity and careful due diligence -- not an easy balance to strike, but a sensible approach in the current, confused environment.

Share:

Tags: British High Court ruling | M&A | regulatory | U.K.

Restructuring

Pensions ruling complicates U.K. business sales

Free preview

Meet the journalists

Laura Board

International Editor

Movers & Shakers

Video

PE sponsors choose IPOs as market rises

Sectors