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Mergers and Acquisitions in Canada

The pension implications that arise in the context of a purchase or sale of a business will depend on whether shares or assets of the target company are being acquired.

Asset Purchase

When a seller corporation with a pension plan sells assets of its business, there are various options available in dealing with the pre- and post-closing pension arrangements. Each option has different risks and implications for both the purchaser and the seller.

The options are as follows:

  1. 1.     the purchaser does not provide a successor pension plan (“No Successor Plan Option”);
  1. 2.     the purchaser provides a successor pension plan (either a new or an existing plan) to the transferred employees, but does not assume or transfer to the successor pension plan any accrued assets or liabilities from the seller’s pension plan in respect of the transferred employees (“Successor Plan Option - No Transfer”);
  1. 3.     the purchaser provides a successor pension plan (either new or existing) and transfers the accrued assets and liabilities relating to the transferred employees from the seller’s pension plan to the successor plan (“Successor Plan Option - With Transfer”); and
  1. 4.     the purchaser assumes full sponsorship and administration of the seller’s pension plan (“Plan Assignment Option”).

There are several issues that impact which options are available and preferable to the seller and the purchaser, including the following:

  1. 1.     Is there a collective agreement, and if so, what does it require?
  1. 2.     What kind of pension plan (DB or DC) does the seller have? What type of plan does the purchaser have?
  1. 3.     Is the seller planning to retain any of the employees who currently participate in its registered pension plan?
  1. 4.     What is the composition of membership in the seller’s plan? Are most of the liabilities attributable to retirees and deferred vested members, or to active employees who will be transferred to the purchaser?
  1. 5.     Is the seller’s plan in deficit or surplus?
  1. 6.     If the seller’s plan is in deficit, will the purchaser require the seller to fully fund the plan before closing if the purchaser is considering assuming the plan? If not, can the purchaser obtain a discount on the purchase price?
  1. 7.     Is the cost of funding the seller’s pension plan on an ongoing basis appropriate for the purchaser if the plan is assumed?
  1. 8.     If there is surplus in the plan, can the surplus be applied to take contribution holidays or withdrawn if the plan is assumed (As mentioned, it is difficult for a purchaser to answer this question within the due diligence period.)?
  1. 9.     What are the current retirement and benefit arrangements of the purchaser? If the purchaser already has a pension plan, will the assumption of the seller’s plan create duplication and additional administrative burdens and costs for the purchaser?
  1. 10.     Is there any language in either the seller’s or the purchaser’s pension plan and funding documents that would prohibit the transfer of assets from the seller’s plan to the purchaser’s plan and the co-mingling of such assets? Is there a risk that such a transfer would not be approved by the regulator, as discussed below?

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