problems in transactions
Roderick Ramage, solicitor, www.law-office.co.uk
first published by distribution to professional contacts on 31
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
The precedent, because of the
novelty of the subject matter should be treated as experimental
In my New Year 2015 update l
wrote a short technical summary about pensions in corporate finance
transactions. Not all straightforward
transactions are as straightforward as they ought to be. Here are a few examples of transactions, in
which I have helped other solicitors as their temporary pension law department.
final salary scheme
“We closed the final salary so
many years ago that we sent the files for shredding.”
In a share sale the only
surviving data about the target group's final salary schemes consisted of
barely a handful of copy papers and notes to the annual audited accounts. The seller's directors could not be brought
to address the pension questions until the buyer's solicitors, demanded
stringent warranties and indemnities.
outcome: The target group's
failure to retain documents was irremediable, so it was impossible to resist
the warranties and indemnities demanded by the buyer. The detailed memory of the company's retired
IFA enabled a report to be prepared for the company's directors and sellers, so
they understood (or at least could not deny that they had been told) why the
warranties and indemnities were unavoidable and the nature of the risks.
lesson: Ensure at the start of
the sale process that the sellers and warrantors understand (a) the
significance of the lack of data, (b) that even if the buyer fails to
understand it, its financiers will, (c) that the lack of data should be
disclosed and (d) that the seller should volunteer appropriate warranties and
moral: A failure to dispose of
this problem at the start meant that, later, the parties were distracted from
the serious commercial points of the deal.
filled by the client
The majority shareholder's own
summary that the target company had, apart from a couple of SSASs for the
directors, an old GPPP and a new automatic enrolment (AE) scheme was, as it
turned out, accurate. However, he had
selected and kept control of the papers for uploading to the data room, and the
documents, names and other details pointed clearly to seven schemes, including
a death in service scheme not in the summary.
He denied the existence of some supposed schemes, even though it was he
who had provided membership schedules with misleading and inconsistent names.
outcome: The final pension
aspects of the deal were easy and straightforward, but only after a great deal
of work to extract the full information and put it into a form that was
compatible with the disclosures in the data room.
moral: Convince the client that
holding onto control of the disclosures will not save money, but will cause
aggravation and cost more in the end.
proprietors' SSAS and scheme pensions
A few months after the sale of a
private company (Target), the corporate seller sent an email to its new
solicitors. “Is it OK to sign the
attached?” The attachment was an
amendment of a pension scheme, of which seller was the only employer and the
members were the directors of the Target.
The scheme had been operated as a SSAS, whose main investment was
property let to the Target, and had power to pay scheme pensions. The amendment deed, prepared by a well-known
professional corporate trustee, would have transferred all the employer's
powers to the trustees, while leaving it in place as the scheme employer. It took the threat of exercising the seller's
powers as employer to remove the trustees and appoint new ones, admit new
members and review the investments to persuade the professional trustee to
produce to a new deed and then and agree revisions to it.
outcome: The parties executed a
deed, by which seller was released and discharged from the scheme and the
trustees (including the professional trustee) gave unqualified warranties, and
the seller was satisfied that there was no material risk of scheme
pensions. Secondary outcomes were (a)
that the members regained control of their own scheme and (b) the legal costs
were several times more than they would have been if the scheme had been
separated from the seller on or before the sale.
moral: No matter how rushed the
sale, the proprietors' pension scheme should be at the top of the agenda.
outsourcing and transfers
This example is not one
transaction but an amalgamation of several.
Local authorities may and often
do agree risk sharing, eg that the LA carries the risks of changes in actuarial
assumption, interest rates, investment returns etc while the contractors carry
them for pay increases, redundancies and ill-health and other early
retirements, but these must be negotiated in the deal and are not incorporated
in the admission agreement, which merely implements the part of the deal that
the transferred employees remain members of the Local Government Pension
Before the 2007 Direction
pension protection for transferring employees was provided through Fair
Deal. The guidance for New Fair Deal
states expressly that it applies only to central government, NHS and maintained
schools pension schemes.
Pension protection is enforced
against contractors and transferees by contract.
Bidders for contracts or
transfers sometimes fail to seek advice about the admission agreement until
after the terms have already been agreed.
In one case, the chairman of a charity, who had signed a service
contract, cancelled it and suffered a penalty, when she realised the pension
risks on having the admission agreement explained.
Conversely, some LAs confuse
Fair Deal with the 2007 Direction, fail to appreciate that pension protection
is not an enforceable right except by contract with the contractor or
transferee and produce the admission agreement, if at all, too late for the
contractor or transferee to be obliged to execute it, with the result that
former LA employees lose or are never given the pension protection that they
are intended to have.
automatic enrolment (AE) scheme
The sellers disclosed (late)
against the AE warranty that the target had not complied with its AE
obligation. (On an assets purchase it
would have been irrelevant to the buyer.)
Enough data had been disclosed to determine the target’s staging date
and calculate the total contribution to an AE date after completion.
outcome: The sellers agreed a deduction from the price
equal to the employer’s and employees’ unpaid contributions. The buyer enrolled the employees into the
buyer’s AE scheme immediately after completion, paid all the arrears of
contributions from the target’s staging date and reported the AE failure to the
Pensions Regulator and the action taken to remedy it.
moral: Be thankful for a competent well managed
client (the buyer), with staff who could understand, agree to and implement a
remedy without interrupting the deal.
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