The Importance of Due Diligence
I happen to be working with a matter that involves an acquisition of a company that occurred several years ago and the crux of the debate involves liability for administration of the retirement plan of the acquired company. As I read the purchase agreement, it struck me that it was virtually silent as to benefit plans and what would happen after the acquisition took place. I have previously written here about COBRA in an entry titled Buyer Beware, and I have also written an article about withdrawal liability, Withdrawal Liability: a Hidden Hazard, both talking about concerns in acquisitions. But I really believe benefit plan due diligence is an overlooked afterthought to many acquisition transactions.
It is important to remember that those representations and warranties in an agreement actually mean something. If a representation is made about the status of a benefit plan being in compliance, that is not the end of it. The parties must include in the contract how they intend to deal with the various benefits plans once the transaction is completed. For example, will there be a need to terminate a plan? Will there be a need to merge plans? Who takes responsibility for funding? What about multiemployer plan obligations? The simple truth is that benefit plans don't just simply cease to exist. They are living entities that likely survive beyond the transaction and can cause real problems for the buyer and the seller both if not properly handled.
It is commonplace in asset purchases for the buyer to immediately hire the employees of the acquired company and make them employees of the buyer. But the acquired company's retirement plan still exists. What will happen to it? Is the buyer going to take the plan and merge it into its own 401(k) plan or is the seller terminating the plan? If the seller ceases to exist, this could create an "orphan" plan where the plan sponsor no longer exists. From a seller's perspective, the Department of Labor and IRS will not look favorably on someone simply walking away from fiduciary duties. From the buyer's side, you would not want to get caught up in the search for someone to take over the responsibilities of plan administration.
I believe that the input of employee benefits counsel is essential to completing any merger or acquisition if for no other reason then to vet these benefit issue and raise appropriate questions about the continuation of administration or termination of the seller's benefits packages. Nothing is as cumbersome as trying to figure out what the parties intended to do well after the deal is completed. It is infinitely more simple, and less expensive, to deal with them before the closing. That's why I encourage buyers and sellers to really do some due diligence, find out what is there and make sure it is being dealt with completely before money changes hands.
