Cross-Border M&A: Identifying And Dealing With Compensation And Benefits Issues - A Canadian Perspective

For the American Bar Association ? Section of Taxation

Meeting, May 8-10, 2008

Introduction

M&A transactions require a comprehensive understanding of

the issues regarding pension and employee benefits. A lack of

clarity in the case law, combined with minimal legislation and

restrictive policies established by regulatory bodies, has created

an uncertain legal environment in this area. In addition, recent

legal developments have made pension plan mergers in Canada even

more complicated.

Given this background, the purpose of this paper is to analyze

the current state of the law regarding pension plan mergers in

Canada, focusing on registered pension plans from an Ontario law

perspective.1

M&A in Canada

In 2007, 40% of all M&A transactions in Canada and 78% of

total M&A value had an international component.2 The

United States remains Canada's largest cross-border M&A

partner. Last year, 54% of Canada's 532 foreign acquisitions

were in the United States, and 44% of the 246 foreign acquisitions

of Canadian companies were made by U.S. companies.3 With

pension issues receiving an increasing level of scrutiny from

market participants, added significance is accorded to knowing

precisely what kind of pension assets and liabilities are involved

in a transaction.

Pension Plans in Canada

The federal and most provincial governments in Canada have

enacted their own pension legislation. This creates a complex area

of law, with overlapping multijurisdictional components. Key pieces

of legislation in Ontario include the Pension Benefits Act

(Ontario),4 the federal Pension Benefits Standards

Act, 19855 and the Income Tax Act

(Canada).6 Government pension regulators administer the

legislation and publish policies and bulletins that provide

guidance regarding matters of interpretation and regulatory

consent. Additional sources of legal obligations are found in

common law concepts such as contract law and trust law. This is

especially relevant with respect to pension plan texts and funding

agreements that form the basis of pension plan documentation. As a

result of this extensive legal framework, pension plans in Canada

are subject to stringent regulation by government authorities, with

substantial and ongoing compliance requirements.

The Anatomy of a Transaction

Acquiring or disposing of pension plans and their associated

liabilities in the context of an M&A transaction can have a

significant effect on a company's financial statements as well

as on employee morale and productivity. Negotiations over

representations and warranties, pre-purchase and postpurchase

administration, as well as over the funding of pension arrangements

will take place between the purchaser and the vendor in all

scenarios described below.

Share transactions are often relatively straightforward because

the purchaser acquires the shares of the vendor company and the

purchased entity can continue uninterrupted, but under new control.

Therefore, a pre-existing pension plan would continue to be

sponsored by the acquired company and the purchaser would accept

all of the vendor's pension liabilities and obligations, making

due diligence extremely important.

Asset transactions tend to be more complicated than share

transactions, with the purchaser acquiring some or all of the

assets and employees of the vendor's business. An asset

transaction does not automatically result in the assignment of the

vendor's pension liabilities and assets to the purchaser.

Absent any specific employment agreement covering key employees or

collective agreements covering unionized employees that would

require the purchaser to provide a successor plan, the vendor and

purchaser have greater flexibility in determining whether or not to

provide a successor pension plan to the affected employees.

Mergers involve the combination of two or more corporations into

one legal entity with the rights and obligations of the merging

companies continuing in the successor corporation. Pre-existing

pension plans of the merging corporations are not automatically

merged, and plans will generally continue separately. However, the

successor corporation may decide that a pension plan merger is in

the best interests of the corporation. In such situations,

understanding the regulatory and legal framework for pension

mergers becomes imperative to effecting the desired result.

The Anatomy of a Pension Plan Merger

A pension plan "merger" describes a scenario in which

two or more pension plans are amalgamated into a single plan

through a transfer of pension plan assets. Thus, what is commonly

referred to as a "plan merger" is actually an asset

transfer. In the context of an M&A transaction, such a scenario

may be in the best interests of the successor corporation as well

as the plan members. Plan sponsors may be able to take advantage of

the surplus in one plan to offset contributions to another.

Additional synergies may be achieved by providing uniform pension

benefits to all employees, reducing plan administration costs and

streamlining regulatory compliance obligations. Moreover, plan

governance may also benefit from a plan merger.

From plan members' perspective, a merger is also preferable

because most pension plans in Canada use years of service as part

of their formulas to calculate employee entitlements. Therefore,

when plans are not merged, the combined pension that a plan member

collects will likely be reduced.

In certain scenarios, the benefits of pension plan mergers are

clear. That being said, to achieve these benefits, practitioners

will need to go through a complex process involving a review of

plan documents, legislation, regulatory policies and case law.

Before a merger is effected, it is necessary to examine the

language of the historical plan documents because this determines

the parameters in which the plan merger may take place. Another

layer of complexity is added when dealing with a plan impressed

with a trust. In the seminal case of Schmidt v. Air

Products,7 the Court held that the power of

revocation must be expressly reserved in order for amendments to be

made to trust instruments. Whether the pension plan is open or

closed will also determine the rights of beneficiaries and affect

the administration of the plan.

Pension legislation does not deal extensively with the subject

of plan mergers or asset transfers. In fact, regulatory control

over the merger process in most Canadian jurisdictions is derived

from the regulator's general authority to permit or deny

approval for asset transfers. This is the case in Ontario, which

requires the consent of the Superintendent of Financial Services

who will give consent only if the pension benefits of the members

of the transferring plan are protected.8 Historically,

Canadian courts have given little attention to pension plan

mergers. However, several recent cases have drawn attention to this

important area of law. Some of the more significant cases are

discussed below.

Aegeon Canada Inc. v. ING Canada

Inc.

Aegeon Canada Inc. and Transamerica Life Canada had arranged to

enter into a share purchase transaction with ING Canada Inc. for

the shares of NN Life Insurance Company of Canada. Under the

agreement, ING had warranted that all required contributions had

been made to the NN Life Pension Plan (NN Life Plan) and that it

was fully funded on a going-concern and solvency basis.

The NN Life Plan was the product of a merger between a Halifax

Life Insurance Company of Canada pension plan (Halifax Plan) and NN

Life pension plan. The Halifax Plan...