When Pension Regulators Intervene in Your Corporate Transaction

WHEN PENSION REGULATORS INTERVENE IN YOUR CORPORATE TRANSACTION

Harold Ashner, Keightley & Ashner LLP (USA)

EXECUTIVE SUMMARY

1What powers does the Pension Benefit Guaranty Corporation have to intervene in a corporate transaction?

PBGC has the ability to initiate an “involuntary termination” of a pension plan in response to a contemplated corporate transaction when it determines that “the possible long-run loss of the [PBGC] with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.” It is the threat of such action that can result in PBGC having considerable leverage to insist on protection for the pension plan in order for a corporate transaction to proceed.

If an involuntary termination were to occur, the sponsor of the plan and each member of its “controlled group” (essentially, affiliated companies tied together by 80% ownership) would be jointly and severally liable for 100% of the plan’s underfunding. PBGC has taken the position that this “controlled group” liability extends to foreign affiliates, but experiences difficulty in its collection efforts.

In certain circumstances, PBGC also has the ability to take action after a transaction has become effective. For example, if PBGC believes that a principal purpose of a company in entering into a transaction was to evade liability in the event of a later plan termination, and the plan does terminate within a five-year period, PBGC can file a lawsuit seeking to impose liability on that company. In addition, PBGC in certain circumstances can seek a retroactive termination date so as to impose liability on the controlled group that had maintained the pension plan as of that retroactive date.

Another tool PBGC has been using with increasing frequency over the past few years is the ability to demand, in the context of certain downsizing events (whether or not related to any corporate transaction), that a companymeet a statutory requirement to provide security to cover a portion of the plan’s underfunding even though the plan is not terminating.

2How to prepare for and respond to intervention by PBGC

Key to preparing for and responding to intervention by PBGC is to understand its concerns, which focus heavily on the unique controlled group liability structure in the USA. In particular, PBGC is concerned about the financial status of each member of the controlled group maintaining a plan, changes in the identity or makeup of the responsible controlled group, and transfers of significant value from any member of the group (even to another member).

It is important to be able to establish the viability of the pension plan following a contemplated corporate transaction by demonstrating that the responsible posttransaction controlled group can afford to meet projected minimum funding requirements.

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