Archive for November, 2008

Mergers and Acquisitions – Don’t Ignore ERISA Employee Benefit Plans

November 18th, 2008

Generally, there are two different ways that companies can grow their existing businesses – 1) obtaining new customers (organic growth) or 2) merging with or acquiring another company.  Many companies attempt to grow through mergers and acquisitions (“M&A”) as it can allow for the rapid growth of a company’s client base and/or business capabilities.  However, M&As can pose numerous legal challenges to businesses.  One of the most often overlooked area in any M&A deal is employee benefits plans.

During a M&A deal, companies generally perform due diligence across all areas of the target company to identify issues that need to be addressed during the negotiation phase of the deal.  If employee benefits plans are not included in this due diligence, an acquiring company can discover that it has inadvertently become the owner of significant employee benefits plan problems.  While problems that arise in the area of employee benefits plans do not generally become “deal breakers”, ensuring that any and all benefits issues are identified and addressed before the final agreement is signed can avoid major headaches in the future.

Benefit plan issues can vary depending on the type of deal that is being contemplated – either an asset purchase or a stock purchase.  In an asset purchase, the due diligence required for employee benefits plans could be reduced if the agreement does not include the buyer assuming liability for employee benefit plans.  However, even in that situation, due diligence on the benefit plans should still be conducted to ensure that the buyer has a complete picture of the seller’s business.

In a stock purchase deal, or in an asset purchase deal where the buyer is assuming liability for benefit plans, the buyer needs to ensure that significant due diligence is conducted on the existing benefit plans.  Generally, this due diligence should include:

  • Identifying all employee benefit plans, programs and practices currently in existence – both formal written plans and informal, unwritten plans.
  • Obtaining all pertinent documents for each plan identified (e.g., plan documents, summary plan descriptions, Form 5500s, annual nondiscrimination testing and audits, determination letters, third party administrator contracts).
  • Reviewing all documentation to ensure the plans are currently compliant with applicable laws and looking for potential problem areas (e.g., accelerated vesting on change of control, unfunded liabilities, funding arrangements for nonqualified deferred compensation plans).
  • Requesting disclosure on currently pending or threatened claims based on benefit plans and on whether any governmental audits have been commenced or are pending.
  • Identifying potential problems to be addressed during negotiation of the deal.

As stated earlier, issues identified during the due diligence process for employee benefits plans are generally not severe enough to stop a deal from closing.  However, if properly addressed during the negotiation phase, they can be factored in with all the other components in the decision making process.  Where these issues are not properly addressed, they can become a significant concern for the buyer after the deal has completed. 

Benefits counsel can assist in completing comprehensive due diligence of a target company’s benefit plans to ensure that the acquiring company does not get blind-sided by benefit issues in the future.  Please contact our office for additional information or to talk to an attorney about your particular situation.