South Carolina Lawyer
SC Lawyer, November 2006, #5.
Mergers and Acquisitions: Ignoring Employee Benefit Issues May Hurt Your Client
South Carolina LawyerNovember 2006Mergers and Acquisitions: Ignoring Employee Benefit Issues May Hurt Your ClientBy Gerald Hubbard Smalls and Roshella JamesAlthough often considered only as a second thought, employee benefits and compensation issues are an integral part of any merger or acquisition. Generally, a merger or acquisition occurs as either a stock deal, asset deal or a combination of both. A stock deal occurs if the stock of a target company is acquired in exchange for the stock of the buyer, including all assets and liabilities. If the acquired entity is a subsidiary, its parent entity is labeled the seller. The acquired entity remains liable to any third party to the same extent it was before the transaction, but the parent entity (seller) may agree in some instances to reimburse the buying entity for some or all of the liabilities that existed before the transaction. If the acquired entity is not a subsidiary of a parent entity, the buying entity, in absence of a seller to assume existing liabilities, factors the liabilities (or potential liabilities) into the purchase price.
An asset deal occurs if the buyer acquires the assets of a target company with the target retaining some or all of its liabilities as negotiated. However, with respect to employment-related liabilities, the buyer may be held liable as a successor employer. Thereby, the buyer may be required to negotiate with existing unions; correct any labor law violations including, but not limited to, employment discrimination laws; and provide certain benefits under COBRA and the Family and Medical Leave Act.
Whether the deal is a stock deal or an asset deal, a benefits manager should be involved in at least four steps of the process: (1) the deal-making/letter of intent; (2) due diligence; (3) negotiating the terms of the agreement; and (4) meshing together (or keeping apart) the benefits programs of the two formerly separate entities.
Benefit issues rarely are a deal-breaker, but they can significantly increase or decrease the final sale price or cause restructuring of the deal. Therefore, performing a comprehensive due diligence review centered on employee benefits related-issues is a necessity. For example, a potential buyer should request the following information from the seller, at a minimum:
° A list of all employee benefit plans, funds, programs or arrangements established, maintained or contributed to by the seller; ° With respect to any plan, fund, program or arrangement: o Plan documents and amendments;
o Trust or custodial agreements; o Insurance policies and third-party administrator agreements; o Current summary plan descriptions and summaries of any material plan amendments; o All regulatory filings within the past three...