Dealing With Significant Multiemployer Pension Plan Issues in Corporate Transactions: Withdrawal liability could be jointly and severally owed by more than one entity in a corporate chain.

• Author: McGeorge, Randy

If your company has targeted or is targeting another entity with a unionized workforce, you should pay particular attention to associated pension obligations. In recent years, a combination of industry and economic factors has led to the massive underfunding of many multiemployer pension plans. Such underfunding can result in substantial liability for employers that cease to have an obligation to contribute or significantly curtail their contribution obligations to such a plan. Thus, a buyer contemplating acquiring a business that contributes to such a plan must undertake thorough due diligence to assess the financial ramifications.

Withdrawal liability is generally calculated by determining a contributing employer's proportionate share of a multiemployer pension plan's unfunded vested liabilities. Because many multiemployer plans are significantly underfunded, even small shares of this underfunding can result in substantial liability. For example, if a contributing employer's proportionate share of a plan's underfunding is only two percent, but the plan's unfunded vested liabilities are $2 billion, the employer's aggregate withdrawal liability exposure could be $40 million. Accordingly, parties to transactions involving employers contributing to multiemployer plans must take great care to identify these issues as early as possible in the negotiation.

To complicate matters further, while a buyer of assets is not liable for the debts and liabilities of the seller under general common law successor liability principles, several recent courts have held that asset buyers may be responsible for asset sellers' withdrawal liability under a successor liability theory. This article addresses this topic and furthermore covers controlled group rules and how withdrawal liability could be jointly and severally owed by more than one entity in a corporate chain.

What Is Withdrawal Liability, and How Is It Triggered?

A company with an obligation to contribute to a multiemployer pension plan is responsible for a portion of the plan's unfunded vested benefits when the company ceases or significantly curtails its contribution obligations to the plan. This sharing of the plan's funding shortfall is referred to as "withdrawal liability." Notably, the obligation to pay withdrawal liability can arise even when the employer has made all of its required contributions under the plan and applicable collective bargaining agreements.

A company contributing to a multiemployer pension plan can trigger three general types of withdrawals: complete, partial, and mass withdrawals. Each type of withdrawal has different consequences and concerns for parties to a corporate transaction.

A "complete" withdrawal generally occurs when an employer either a) permanently ceases to have an obligation to contribute to the plan (e.g., a collective bargaining agreement expires) or b) permanently ceases the business activity that gave rise to its participation in the plan (e.g., upon the employers sale of the business in an asset deal).

A "partial" withdrawal occurs in three different situations, one based on a quantitative test and two based on qualitative factors. First, a partial withdrawal occurs when there is at least a seventy percent decline in historical contribution base units over a designated three-year testing period. Second, a partial withdrawal can be triggered when an employer ceases to have an obligation to contribute for one or more but fewer than all collective bargaining agreements, but continues to perform previously covered work in the jurisdiction of the collective bargaining agreement, or transfers such work to another location or to an entity owned or controlled by the contributing employer. Third, a partial withdrawal can occur when an obligation to contribute ceases at one or more but fewer than all facilities, but the employer continues to perform covered work at the facility without an obligation to contribute to the plan.

A "mass withdrawal" occurs upon the withdrawal of all or substantially all of the contributing employers. For these purposes, there is a presumption that any employer who withdraws within three years of a mass withdrawal has withdrawn as part of the mass withdrawal. A mass withdrawal generally results in greater withdrawal liability to each withdrawing employer than does a complete or partial withdrawal. It is therefore important to assess the health of the fund to determine the likelihood of this type of systemic event.

Sellers in transactions often posit that withdrawal liability is irrelevant to deal pricing...