The Unexpected Purchase
Article originally published by Benefits Canada, February 29, 2008
"The Unexpected Purchase"
When a purchaser buys the shares of a business the purchaser takes not only the assets but the liabilities as well, as there is no change in the corporate structure, only a change in share ownership. Often corporate transactions are structured so that the purchaser only acquires the assets of the business so that liability “problems” can be left with the seller. In an asset deal, the general rule is that the purchaser and seller determine which assets will be part of the transaction. However, under Ontario’s labour laws, that general rule does not always hold true.
If the seller’s business has a collective agreement in place, the purchaser must be aware of successor employer rules. Under Ontario’s Labour Relations Act, where an employer who is bound by a collective agreement sells all or part of its business, the purchaser is bound by the collective agreement. “Sells” is broadly defined under the OLRA—the term includes leases, transfers or any other manner of disposition, and the Labour Board has interpreted the meaning of “business” equally broadly such that if a purchaser acquires assets that are essential to the operation of the business, it is likely that the purchaser has acquired the collective agreement as well.
What does this mean in a pension context?
Firstly, the collective agreement may provide for participation in a multi-employer pension plan (MEPP). MEPPs may provide either defined benefit (DB) or defined contribution (DC) pensions. However, the contributions required to be made to a MEPP by a participating employer are generally fixed by the collective bargaining agreement, which means that the amount of funding is known. In Ontario, if there is a funding deficiency in a MEPP, then on wind-up of all or part of the MEPP, the benefits can be reduced. However, even though liability is generally fixed, a purchaser is well advised to complete thorough due diligence before closing the transaction in order to be sure all potential liabilities are identified. If there are employees in other provinces or if the specific terms of the MEPP documents so provide, a participating employer could face additional exposure.
Secondly, if the seller sponsors a pension plan, there may be a requirement to transfer that plan to the purchaser. This will depend upon the terms of the collective agreement. In some cases, the pension plan forms part of the collective agreement. If this is the case, then the pension plan must be transferred from the seller to the purchaser as part of the deal. It is critical that the purchaser conduct due diligence on the applicable pension plan documents prior to agreeing to purchase the business. If the pension plan has a funding deficiency or prior administrative irregularities, the purchaser may wish to renegotiate the terms of the transaction, or the seller may be required to bring the pension plan into compliance before closing.
Even if the collective agreement does not reference a specific pension plan, the collective agreement could mandate the provision of a certain level of pension benefits. If the purchaser is a successor employer under the labour laws, and the collective agreement is transferred accordingly, the purchaser will have to provide a pension as specified in the collective agreement. This applies whether the bargained benefits are of the DB or DC variety.
The successor employer rules can sometimes result in unintended consequences for an unwitting purchaser. The key, as always, when entering into a corporate transaction is to conduct thorough due diligence and wherever there is a union involved, seek the advice of specialized counsel who are familiar with pension and labour issues.
To view the article, please visit the Benefits Canada website.