In today's business climate, more and more employers are expanding their business through mergers or acquisitions. There are many issues to be considered as the details of a transaction are negotiated and implemented. Without proper planning, changes in corporate structure or the sale of a division can wreak havoc on a carefully crafted HR strategy.
With a little attention to detail, however, a company (Buyer) seeking to purchase a new business (Target) can both: (1) assemble a post-transaction benefits and compensation package that is key to the new organization's ability to attract and retain top talent; and (2) eliminate the possibility that a "hidden" liability may arise after the transaction. Further, a company seeking to divest of a business (Seller) can ensure that any liabilities associated with Target employees are assumed by Buyer, so that Seller can close the books and move forward.
The following are examples of some of the issues that an employer contemplating a merger or acquisition (either Buyer or Seller) should consider:
Qualified Retirement Plans
- Does Target maintain a defined benefit plan? If so, what entity will have responsibility for the plan post-transaction? If Buyer is to acquire a defined benefit plan that is not fully funded, it generally also will be assuming the responsibility to fully fund all benefits due under the plan. This should be taken into account in determining the purchase price. Additionally, certain events that occur in the context of a transaction must be reported in advance to the Pension Benefit Guaranty Corporation (PBGC).
- Will the employees of Target receive benefits under a defined contribution or 401(k) plan after the transaction closes? If so, the Buyer will need to analyze how the new employees will impact the plan's nondiscrimination test results. This analysis may include consideration of the "controlled group" rules. The Seller may wish to be relieved of the responsibility for maintaining plan accounts for the Target employees who will leave its employment as a result of the transaction. Depending on the circumstances, this may be best achieved by a transfer of assets directly between the Seller's plan and the Buyer's plan. Alternatively, it may be better to simply allow Target's employees the ability to roll over an account balance from the Buyer's plan to the Seller's plan.
Health And Welfare Issues
- Will any Target employees become eligible for COBRA coverage as a result of the transaction? Are there any individuals who are eligible for COBRA independent of the transaction (for example, divorced former spouses) who will continue to be COBRA-eligible after the transaction? If so, will that coverage be provided under Buyer's or Seller's health plans? Although COBRA provides rules assigning responsibility to provide coverage in the context of a merger or acquisition, the parties are free to change these rules by agreement.
- Does Target offer health or other welfare benefits to retirees? If so, will these responsibilities belong to Buyer or Seller after the transaction? If the Buyer is to assume liability for providing these benefits, it will wish to perform due diligence on these benefits (by reviewing all of Seller's plan documents, summary plan descriptions and participant communications) to determine whether these benefits may be modified or terminated, or whether the retirees have vested in these benefits and acquired the right to receive them for life.
Executive Compensation
- Will the transaction trigger change-in-control or other severance payable to Target's executives? If payment of such benefits will significantly reduce Target's net worth, Buyer should take this into account in negotiating the purchase price.
- Will the transaction trigger payment of benefits under Target's nonqualified deferred compensation plans? Is there any way that the payment of benefits may be avoided? What is the impact of the new changes in the tax law made by the addition of Section 409A of the Internal Revenue Code of 1986, as amended (the Code) pursuant to the American Jobs Creation Act of 2004?
Published October 1, 2005.
