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Mergers and Acquisitions in Canada

A purchaser should request copies of as many pension plan disclosure documents as possible, including:

  1. 1.     current and historical plan texts, funding agreements (i.e. trust agreements, insurance contracts), employee communications, and all amendments thereto;
  1. 2.     actuarial valuation reports and cost certificates;
  1. 3.     collective agreements;
  1. 4.     recent financial statements;
  1. 5.     investment policies;
  1. 6.     funding agent and investment manager reports;
  1. 7.     correspondence from regulators dealing with material issues; and
  1. 8.     legal opinions obtained regarding plan terms, such as the right to take contribution holidays and to charge expenses to the plan assets.

The intent of any due diligence process should be to determine how the seller’s pension plan(s) is structured and administered, and how the assets are invested. It should also identify contribution and administration costs and liability implications (e.g. unfunded liabilities, outstanding claims by plan members, issues raised by regulators and any promise to employees to increase the pension benefits offered).

Ideally, if a purchaser is proposing a post-closing for the purpose of withdrawing surplus from the seller’s/target’s pension plan, or using such surplus for contribution holidays or to offset a deficit in another pension plan of the purchaser, then the purchaser should review all current and historical plan and funding documents of the seller’s pension plan to determine if any of these proposed actions are legally permitted. Practically speaking, given the time constraints of, and the limited documentation that is available during the due diligence process, it is very difficult for a purchaser to obtain a legal opinion on these proposed actions. If that is the case, the purchaser should not simply assume, when putting together its bid for the business, that any of these proposed actions can be carried out (especially since in the case of employer surplus withdrawals and pension plan mergers, regulatory approval would be required post-closing and may not necessarily be obtained). Furthermore, as noted above, the terms of the collective agreement that are applicable to the target employees would impact the post-closing pension plan arrangements.

With respect to funding issues in a DB plan that are identified in the due diligence process, the purchaser should consult with its own actuary for additional information and assistance. For due diligence relating to DC plans, some of the concerns, among others, would be the manner in which plan members have been advised of their investment choices, whether sufficient investment choices were provided, the manner in which the target company monitored the performance of the investment options offered and selected by plan members, and whether the investment options were permitted under applicable laws.

Within the past 12 months, we have seen the U.K. Pensions Regulator take action to impose liability on Canadian companies that were heavily involved in the operation of U.K. affiliates that operated drastically underfunded pension plans. Similarly, ERISA in the U.S. contains provisions that would enable the U.S. Pension Benefits Guarantee Corporation to seek damages against Canadian companies that participate in an ERISA defined control group that contains underfunded U.S. pension plans. Given the rising reliance on these “long-arm” laws by the U.S. and U.K. pension regulation and guarantee entities, a potential purchaser should carefully consider the involvement of any Canadian entity in the control or direction of U.S. or U.K. affiliates that sponsor pension plans.

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