Deal-Breaking M&A Issues
from Benefit Plans and Executive Compensation
Merger and acquisition transactions will seldom break-apart due to issues related to employee benefit plans and executive compensation. But seriously disruptive issues may arise, and are most likely to explode, when overlooked until the last minute. The table below is intended to facilitate the detection, negotiation, and resolution of possible problems. As a general matter, sellers may defuse risks and streamline negotiations through proactive pre-sale planning. On the other hand, buyers are able to maximize their deal-related protections (and their post-closing alternatives) by assuring early stage attention to the items listed below.
Note that the following list merely illustrates the range of benefit plan issues that may interfere with a change in corporate control (CIC) transaction. Disclosure schedules will often suggest other material issues, such as benefit plan defects and potential liabilities. Overall, sellers, targets, and buyers should always be represented in these matters by experienced M&A ERISA counsel.
__ Key employees with the right to resign with full severance upon a CIC.
__ Key employees not subject to post-employment restrictive covenants.
__Covenants and agreements not assignable to the buyer (or surviving entity).
Equity Award Plans
__ Out-of-the-money stock options that employer cannot unilaterally cancel.
__ Stock options with a below-market exercise price on the grant date.
__ Uncertainty over how equity awards will be handled upon a CIC.
__ Violation of federal and state registration or disclosure requirements.
__ Questionable compliance with §409A.
__Whether plans with material benefits will terminate or continue following the CIC.
__Whether rabbi trusts will continue, or be formed to provide CIC protections for executives
__ 280G golden parachute penalties.
__ Lost accelerated vesting, severance, or other benefits due to 280G limits (or the need to replace them).
__ The need for a shareholder cleansing vote, with associated disclosures and risks.
401(k) and other Defined Contribution Plans
__ Litigation risks from excessive fees, poorly monitored investments, or employer stock investments.
__ Compliance problems in need of correction (how to correct, and by whom), and their impact on a possible plan termination or merger.
__ Positioning for plan termination (to avoid post-CIC “orphan plan” risks).
Defined Benefit Plans
__ Underfunding on a current or plan termination basis.
__Whether the plan will terminate or continue post-CIC.
__Questionable appraisals of employer stock, including the CIC value.
__ Whether the ESOP will terminate or continue post-CIC.
__ Whether an outstanding securities acquisition loan will be discharged or continued.
__ Whether unallocated shares will be released solely to seller’s employees.
__ How, and by whom, ESOP shares will be voted in connection with the CIC.
__Significant withdrawal liability for underfunded plans.
__ Bonding and other ERISA 4204 issues related to an asset purchase.
__Whether plan contributions will continue or terminate post-CIC.
Group Health Plans
_Self-insured plans without adequate stop-loss coverage (or excessive exposure to uninsured claims).
__Whether buyer or seller will be responsible for material COBRA obligations.
Life Insurance (COLI)
__Whether significant corporate-owned life insurance will be continued, terminated, or transferred to the executive (and the terms for transfer).
__ Whether the plan is terminable at will, or provides lifetime benefits.
__Whether the plan will continue or terminate post-CIC.
__Whether a plan is terminable at will, locked-in for some time post-CIC, or triggers significant severance liabilities.
Contact: Mark Poerio, Partner (202.969.2248) / firstname.lastname@example.org
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