Pensions In The Context Of Cross-Border Merger And Acquisitions: A Canadian Perspective


Being able to navigate through the complicated pension landscape in Canada has become increasingly important with the surge in M&A activity in recent years and the phenomenal growth particularly in cross-border transactions. These transactions therefore 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. And 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, with a focus on registered pension plans from an Ontario law perspective.1

M&A in Canada

In last year's second quarter, 39 percent of all M&A in Canada transactions and 90 percent of total M&A value had an international component.2 The United States remains Canada's largest cross-border M&A partner. During last year's first quarter, 44 percent of Canada's 122 foreign acquisitions were in the United States, and 57 percent of the 44 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 makes for 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 post-purchase 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 through 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.

The benefits resulting from a merger of pension plans in certain scenarios are clear. That being said, to achieve these benefits, practitioners will need to go through a complex process...

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