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Mergers and Acquisitions in Canada


In addition to a registered pension plan, the target company likely provides a variety of other benefit arrangements for its employees. Although it is not possible to address all such benefit arrangements here, retiree benefits and supplemental executive retirement plans (“SERP”), also called “top-up plans,” are briefly addressed below.

Retiree Benefits

In the due diligence process, it is important for a purchaser to determine whether the target company provides retiree benefits to its current retirees and if such benefits have been promised to current employees upon their retirement, pursuant to either a collective agreement, employment contract or employee communications. With respect to existing retirees, unless the right to change or terminate the retiree benefits was reserved by the target company and such right was properly communicated to the retirees while they were employed (i.e. prior to retirement), the target company may not change or terminate these benefits, as they are usually “vested” in the retirees.

In a share transaction or merger, retiree benefit liabilities will remain with the target company. Similarly, if the current employees have been promised retiree benefits by virtue of a collective agreement, employment contract or employee communications, the obligation to provide such benefits would be attached to the target company. The target company’s ability to change or terminate the benefits for future retirees in respect of unionized current employees will depend on negotiations with the union, and in respect of the non-unionized current employees, whether or not the target company reserved the right to change or terminate its promise, if any, and if such a right was properly communicated to such non-unionized employees.

In an asset deal, the purchaser may be required to provide retiree benefits to the transferred employees due to a collective agreement, or the seller may be required to provide substantially similar salary and benefits in the aggregate to the transferred employees by the purchaser.

SERPs or “Top-Up Plans”

As noted above, the Act imposes a limit on the maximum benefits that can be provided under a DB plan. Some employers promise to provide employees with the amount of pension the individual would have otherwise received under a DB plan, but for the limit in the Act (it is less common to see top-up plans for DC plans). The pension benefit amount exceeding the limit in the Act (the “top-up benefit”) is usually provided pursuant to a SERP (or simply via an employment contract, which is referred to as a SERP for discussion purposes). Top-up benefits are not legislated under pension legislation at this time and can be either funded or unfunded. If a SERP is funded, certain rules in the Act apply.

SERP liabilities can be costly and may not be easily discernible from the due diligence process, since they are not subject to legislative requirements to prepare actuarial valuation reports. Questions that a purchaser should ask include whether it is funded, how it is funded, if there is a deficit, the number of participants and

the costs of fulfilling the SERP promises. Again, if the seller provides a SERP, the purchaser in an asset deal may be required by the seller to provide the same kind of arrangement post-closing.

MEPPs: Multi-Employer Pension Plans

Many Canadian employers participate in MEPPs pursuant to collective agreement obligations, or simply because they are attracted to these arrangements where they do not have any obligations to administer the plan. MEPPs are administered by boards or individual trustees. They are less common in non-unionized workforces.

In the last few years, there have been several surprising and significant lawsuits and regulatory prosecutions launched in respect of MEPPs. The surprising element has been the alleged liability of the participating employers who had the impression that their liability in respect of the MEPP in which they participated, was limited to the amount of contribution they promised to make to the MEPP, as set out in the collective agreement. That may not be the case. With the exception of Quebec, pension legislation across Canada allows benefits under a MEPP to be reduced in the event of a termination of the MEPP in circumstances where there is a deficit. The plan documents, however, must allow this.

In litigation referred to as the “Participating Co-Ops” litigation (Financial Services Tribunal of Ontario, File Number P0275-2006), the Ontario pension regulator took the position that the participating employers were liable for the deficit in a terminated MEPP due to specific wording in the MEPP documents. In other litigation referred to as “CCWIPP” (Ontario Superior Court of Justice, File Number CV-06-CV324987-0000), plaintiffs in a $2-billion representative action took the position that certain participating employers were liable for the consequences of alleged poor investment decision-making. That litigation recently settled.

Purchasers of a business should be aware that although the target company may genuinely believe that it has no liability in respect of the MEPP in which the target company participates, that belief may not be upheld by the courts. Accordingly, purchasers should seek representations and warranties that there are no MEPPs or, alternatively, if there is a MEPP issue, that the MEPP has been administered in accordance with applicable laws and permits the reduction of benefits in the circumstances of a deficit.

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