M&A Checklist : Dealing With Employee Benefits & Executive Compensation

Wednesday, August 15, 2007

Michael Lawson, Jeleen Guttenberg, and Rhan Soh, Skadden Arps Slate Meagher & Flom, Los Angeles, CA, http://

Abstracted from: How Employee Benefits And Executive Compensation Issues Affect The Sale Of A Business
ALI-ABA Business Law Course Materials Journal - Vol. 31, No. 2, Pgs. 5-21

The bargain of the benefits.
One of the more complex matters that M&A dealmakers must address is how to handle the acquired company's employee benefits, including stock options, traditional pension and welfare benefit plans, employee loans, and even unfunded vacation and severance payments. In statutory mergers and stock acquisitions, the general rule is that the buyer takes over the seller's plans unless otherwise agreed; in asset purchases, the opposite is true. Yet, as employee-benefit attorneys Michael Lawson, Jeleen Guttenberg, and Rhan Soh demonstrate, the regulatory context and the situation­for example, whether the buyer has comparable plans and whether the seller will continue to exist­make it imperative to negotiate changes. The common thread throughout is that buyer's counsel ought to invest significant time and resources in studying the seller's plans and ensuring that they comply with all current regulatory requirements. Of particular importance are funding requirements for defined-benefit plans, the Sarbanes-Oxley Act's prohibition on insider loans, and the need for approvals by the board or a committee of independent directors for a variety of equity-based plans.

Equity plans.
Stock options and similar equity-based compensation plans require careful groundwork in an acquisition. For example, counsel should watch for appropriate approvals by the parties' shareholders, negotiations (if necessary) to avoid triggering golden-parachute excise taxes, and due registration of the modified options by the buyer after closing. New York Stock Exchange and NASDAQ rules permit dispensing with shareholder votes when the transfer from seller's to buyer's securities reflects only technical recalibration, among other limited variations. Various methods can mitigate the effects of golden-parachute payments triggered by change-in-control clauses, but the authors believe that a degree of one-on-one negotiation with the affected executives is inevitable. Sometimes an acquisition can accelerate the vesting of options. The parties could negotiate on this point, since the buyer is in a weak position to make changes in option plans without consent of all the optionees.

Benefit plans.
Much of the regulation under ERISA and other statutes deals with the handling of employee benefit plans, including 401(k) and other defined-contribution plans, defined-benefit plans, and welfare policies such as medical, life, and disability plans. Pension benefit plans can be single- or multi-employer (e.g., union-administered) plans. Case law under ERISA imposes successor-company liability on the buyer, regardless of its intent, if it continues the acquired business unit in substantially the same form. The parties may wish to negotiate around the default rules but usually, in the case of defined benefit plans, seek to avoid any partial termination of the seller's plan that would trigger vesting­and funding­of the transferred employees' benefits. When the buyer wishes to maintain only its own plans, the parties can negotiate for the termination of the seller's plan as a closing condition (and accept the vesting consequences), then transfer assets or accounts to the buyer's continuing plans. With defined-benefit plans, the authors observe that parties may also negotiate the basis for evaluating the adequacy of the assets to fund the plan's liabilities; buyers prefer "projected benefit obligations" and sellers favor "accumulated benefit obligations."

Welfare plans. Even in the mundane world of welfare plans, negotiation can become intense, especially if the funding vehicle for the particular plans contains assets that the seller believes exceed actual current obligations. In many instances, the ERISA-mandated summary plan descriptions are the only documentation of the plan. If so, the authors admonish dealmakers to review the documents carefully; make sure the employer retains the right to modify and end the plan, lest employees claim lifetime rights. Statutes such as COBRA and HIPAA have specific rules for continuation of benefits, often imposing ongoing obligations on the seller. The parties may also negotiate a division of responsibility for claims under these plans incurred before the merger but filed only afterwards.

Abstracted from ALI-ABA Business Law Course Materials Journal, published by ALI-ABA Committee on Continuing Professional Education, 4025 Chestnut Street, Philadelphia, PA 19104-3099.

Return to Library of Business Information