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Mergers and Acquisitions in Canada

Generally, under pension legislation, if a member of the seller’s registered pension plan, whose employ-ment has been terminated (or “transferred” in the case of Quebec) due to the sale of a business, commences employment with the purchaser and participates in the purchaser’s registered pension plan, the following applies:

  1. A.     the individual continues to be entitled to all benefits accrued in the seller’s plan up to the date of the sale; and
  1. B.     for purposes of any eligibility conditions, vesting and locking-in of benefits in either plan, all years of employment and membership in the seller’s plan and the purchaser’s plan shall be taken into account (i.e. there is a deemed continuation of employment and plan membership for limited purposes, despite the fact that under common law there is a termination of employment with the seller). This deemed continuation of employment and plan membership is relevant in cases where, for example, a member of the seller’s plan could be eligible for enhanced early retirement benefits if he or she meets the age and service combination of 85. The member’s years of service with the purchaser would count towards that age and service threshold and the member could in fact become entitled to such enhanced early retirement benefits in the seller’s plan by virtue of his or her employment with the purchaser.

(A) does not apply if the member’s accrued assets and liabilities are transferred to the purchaser’s plan. (B) applies whether or not assets and liabilities are transferred.

Due to the deemed continuous employment and plan membership requirement in the sale of a business context, in general, affected members of the seller’s plan are not entitled to exercise transfer options in respect of accrued benefits, which would otherwise be allowed if an employee terminated employment or plan membership in ordinary circumstances. One exception is British Columbia, which does allow members to exercise transfer options, despite the deemed continuous employment and plan membership rule.

In several provinces (including British Columbia, Ontario and Nova Scotia), if a successor registered pension plan is not provided by the purchaser to the transferred employees, the pension regulator may order the seller to wind-up its pension plan, either partially or fully, depending on whether some or all of the seller’s plan members have been hired by the purchaser. The amount of notice that the regulator must provide regarding this type of order varies by province. Recent amendments will remove partial wind-ups for Ontario registered pension plans in the near future.

Even if a successor pension plan is provided, but is subsequently terminated by the purchaser in full or in part after closing, the seller is still vulnerable to a regulator’s order to wind-up its plan (again, either in full or in part, depending on how many of the transferred employees have had their membership in the purchaser’s plan terminated). The seller could seek a covenant from the purchaser that it will keep the successor pension plan in place for a specified period of time after closing (e.g. two years). As a purchaser, it is not desirable to be bound by such a covenant as several circumstances (e.g. insolvency or corporate re-structuring) could impair the purchaser’s ability to comply with it.

In Alberta, a wind-up of the seller’s plan is required if the assets and liabilities of the transferred employees are not assumed by the purchaser’s pension plan, while in Saskatchewan, a wind-up might be ordered by the regulator in these same circumstances.

In a partial or full plan wind-up, the law requires that affected employees be granted immediate vesting and transfer options in respect of their accrued benefits. In addition, in Ontario and Nova Scotia, if the plan includes enhanced benefits (e.g. early retirement benefits) and certain age and service requirements are met, special “grow-in benefits” must be paid to members affected by a partial or full wind-up. Immediate vesting and “grow-in benefits” translate into higher-funding costs for the plan sponsor. (The grow-in benefits are only applicable to DB plans and are not relevant to DC plans.) Thus, in Ontario and Nova Scotia, the cost implications to a plan sponsor of a DB plan wind-up could be much more significant than those of a DC plan, depending on the enhanced benefits, if any, provided under the DB plan. Once partial wind-ups are removed from the Ontario pension regulations, Ontario members will be entitled to these additional benefits on their termination of employment or deemed employment if they participate in a successor pension plan.

A plan wind-up may also be undesirable to a seller because it triggers the legal requirement to distribute the surplus allocable to the terminated employees. In Alberta and British Columbia, the legislation clearly states that on a partial wind-up, an affected member is not automatically entitled to share in surplus. In Quebec, partial wind-ups do not exist. Federally regulated DB plans are generally not subject to this surplus distribution requirement upon a partial wind-up.

For both DB and DC plans, a wind-up report will have to be filed with the regulator for approval before any accrued benefits can be distributed from the plan. A wind-up report for a DC plan will be much simpler and less costly to prepare than a DB plan wind-up report, which will require actuarial input.

For all of the foregoing reasons, a seller may wish to avoid a requirement to wind-up its registered pension plan due to the sale of its business. Provisions can be negotiated in the sale agreement to reduce the risk of an immediate wind-up by requiring a purchaser to offer a successor plan.

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