© de pardieu brocas maffei a.a.r.p.i. employment and labour complications in due diligence...

© De Pardieu Brocas Maffei A.A.R.P.I.

Employment and Labour complications in due diligence investigation and acquisition

Pensions


SUMMARY

I – Differences between mandatory and voluntary pension schemes

II – Differences in pension undertakings

III – Various approaches to safeguarding: pension insurance or reservation of liability in the employer’s balance sheet

IV – How does an M&A transaction affect pension liabilities and collateral for pension liabilities.

V – How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the seller’s handling of pension issues?

220.10.2011Employment and Labour complications in due diligence investigations and acquisition

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I - Differences between mandatory and voluntary pension schemes


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The pension schemes likely to come up in an M & A transaction are in France and in Sweden:

1.1 State pension scheme in France

Covers all employees

Funding: contributions paid both the employer and the employee

Pay-as-you-go system

Safeguarding: no liabilities for employers, except paying the contributions


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1.1 bis - Public pension scheme in Sweden

Covers all employees

Funding: contributions paid by the employer solely through payment of statutory social security charges

Safeguarding: no liabilities for employers, except for paying the contributions


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1.2 Mandatory supplementary schemes in France: ARRCO and AGIRC

Covers all employees: ARRCO covers non-executives employees, and also executives employees on the so-called Tranche A of the social security ceiling (currently 2 946 euros)

AGIRC covers executive employees and assimilated executives (called Art.36)

Funding: contributions paid both by the employer and the employee

Pay-as-you-go system

Safeguarding: no liabilities for employers, except paying the contributions


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1.2 bis - Mandatory supplementary pension schemes in Sweden:

There is no statutory requirement to provide supplementary pension scheme benefits in Sweden

However, the working conditions on the Swedish labour market, including employees’ entitlement to supplementary pension benefits, is traditionally regulated by collective bargaining agreements (approximately 90% of all employers are bound to apply collective bargaining agreements)

The most predominant supplementary occupational pension schemes on the Swedish labour market are the ITP pension scheme (DB/DC for white collar employees) and SAF-LO Collective Pension (DC for blue collar employees)

Supplementary pension schemes under CBAs are financed by the employer solely and safeguarded through payment of pension premiums and/or credit insurances


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1.3 Voluntary pension schemes in France

Covers all employees or a specific category of employees, often granted to senior executives

Defined contributions: level of pension is not guaranteed, or

Defined benefit: pension promise based generally on service and salary to top up the mandatory pensions 2 types of benefit schemes



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1.3 bis - Voluntary pension schemes in Sweden

Subject to individual agreement between the employer and the employees.

Normally applied for employees who are not covered by any CBA or higher executive employees

Individually agreed pension schemes are usually DC which are financed and safeguarded through pension insurance policies taken out with insurance companies



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1.4 Individual savings schemes in France

PERCO:

Specific savings scheme enabling employees to build up, with the help of the employer, additional income at the time of their retirement through a life annuity or a capital

Funding:

Employees may contribute their voluntary and mandatory profit sharing, sums invested in a company savings plan and voluntary payments

Employer’s contributions are a fixed amount subject to ceilings: 16% of the annual social security ceiling (i.e. up to 5.656,32 euros)

Liability of the employer is to pay the contributions provided in the plan



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Company savings time scheme:

Scheme granting employees rights to paid leave by accumulating time or money, such as holiday leave or overtime hours to possibly allow early retirement or complementary benefits on retirement. Possible contribution of the employer



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1.4 bis - Individual savings scheme in Sweden

Individual pension savings scheme in Sweden are normally not related to the employment, but rather a private matter for the individual employee

According to some CBA’s and under some individual employment agreements, the individual employees may be allowed to make salary deductions in return for cost-neutral supplemental pension premiums paid by the employer to the existing occupational pension scheme or a separate supplementary pension scheme

Due to lower employer’s tax rate on pension premiums compared to payments of salary, a cost neutral salary deduction for the employee will result in a pension premium paid by the employer which higher comared to the salary deduction

Individual savings scheme are normally DC



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II - Differences in pension undertakings


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2.1 French ARRCO and AGIRC schemes

On an industry-wide basis, implemented through private non-profit legal entities that serve the general interest

The non-profit legal entity and the rates of contribution or allocation of such rate between employer and employee could be determined by branch collective bargaining agreement

If not, employer chooses the level of contributions between a minimum and a maximum threshold



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2.2 Voluntary schemes in France

Either individually agreed, or by collective bargaining agreement, or unilaterally by the employer, or by referendum (more rare in practice)

Contributions paid generally only by the employer



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PERCO

Either implemented through a company collective agreement, or via an agreement with the works council or by ratification of 2/3 of the staff

Specific rules apply for the management of the funds collected and to the kind of investments which may be made under this scheme to preserve the security of the savings

Company savings time scheme

Either by branch agreement or by company collective agreement, employer must preserve the acquired rights in this scheme



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2.4 Voluntary schemes in Sweden

Individually agreed or unilaterally established by an employer as a result of a benefit policy

Defined contributions/defined benefits: contributions paid only by the employer

For higher executives: direct pension arrangements may be financed and safeguarded by the employer through an endowment insurance policy which has been pledged to the employee



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III - Various approaches to safeguarding: pension insurance or reservation of liability in the employer’s balance sheet


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III - Various approaches to safeguarding: pension insurance or reservation of Liability in the employer’s balance sheet

3.1 State and mandatory supplementary schemes in France

Payment of contributions are directly in the charges of the company and recorded as such in the employer’s balance sheet

3.2 Voluntary schemes in France

Defined contributions scheme: always to an external company, in general an insurance, mutual or welfare company


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Defined benefit scheme:

Self administered and unfunded: in such a case pensions are paid out by employer out of its cash flow and therefore correct valuation is key OR payment to a separate fund. Reserve not mandatory under French law when internal funding, but liabilities must appear in an annex to the balance sheet



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PERCO : investment funds

Company savings scheme: insurance or financial guarantee to be defined in the agreement implementing such scheme



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3.4 - Safeguarding of State and mandatory supplementary schemes according to CBAs in Sweden

Payment of charges to the statutory public pension scheme is made through the employer’s payment of social security charges

The predominant supplemental occupational pension schemes under CBA’s in Sweden are safeguarded either by

payment of premiums to external insurance companies; or

a reservation for the accrued pension debt in the employer’s balance sheet combined with a credit insurance taken out by the employer

more rarely, the employer may safeguard pension liabilities through establishment of a separate pension trust which holds assets corresponding to the employer’s pension liability


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IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities?


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4.1 M&A transaction effects on pension liabilities in France

Share transfer

No effect on State pension scheme, and mandatory supplementary schemes

No effect on voluntary and individual schemes


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Asset / business transfer / merger

State pension scheme and mandatory supplementary schemes

Pension rights under mandatory supplementary schemes are portable through successive employers and in general do not raise specific issue when a transaction occurs

Merger : it may be necessary for the absorbing company to harmonise the rates of contribution except if the merged company remains as a distinct establishment of the absorbing company. Changes of contribution requires approval of the employees


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CBA:

Former agreement does not transfer but continues to apply (financing, acquisition and liquidation of rights, liabilities) during a maximum 15 months period during which the employer must negotiate a new agreement. Such consequences will depend upon whether or not the new employer has a similar scheme:

• If similar scheme: problem of harmonisation

• If no scheme and new employer does not want to continue: problem of definition of accrued right benefits (active/inactive employees)


For voluntary & individual schemes

Consequences depend upon the method of implementation


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Referendum:

• Same rules

Unilateral decision of the employer:

• Possibility to terminate subject to a sufficient notice, consultation of employee representatives and written information of employees

Individually agreed:

• Express consent of the employees required


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4.1.2 - M&A transaction effects on pension liabilities in Sweden

Share transfer

A share transfer transaction does not affect the pension liabilities of the target company towards its employees, and the current pension arrangements will normally remain unchanged after the transaction

Asset transfer

In case of an asset transfer, the acquiring entity will normally assume the responsibility to provide the same benefits as the seller entity with respect to pension undertakings going forward from the transfer date.

Pension liabilities accrued prior to a transfer of assets does not normally transfer to the acquiring entuity, but will remain with the seller.

If the seller is bound by a CBA which prescribes a specific pension scheme, then the buyer entity will become obliged to apply the same pension scheme by default of law, unless the CBA is terminated prior to the asset transfer, or if the buyer is bound by another CBA pension scheme.

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Employment and Labour complications in due diligence investigations and acquisition

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V - How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the seller’s handling of pension issues?


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In general, from the French perspective, negotiation of a warranty to establish that:

Contributions have been duly paid for mandatory schemes, and

On the existence and level of funding of any voluntary arrangement. It may require to cover exactly the beneficiaries, the rate and amount of contributions, and premiums paid, latest actual valuation

Guarantee of any transfer of value issue could be key, or negociation of a reduction of the purchase price


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For defined benefit arrangement, it may be secure to have an actuary reviewing the funding of the scheme, or whether any reserve in the accounts is sufficient

Actuarial valuation will also be required for any transfer of assets/value for retirement liabilities agreed between the parties. Particular attention should be given to schemes terminated by the former employer to ensure the absence of possible liabilities if the scheme has not been correctly terminated.



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Comments from a Swedish perspective:

It is generally recommended to get access to direct communication with target company representatives to fully understand the existing pension arrangements, as written documentation provided in data rooms not always gives adequate information

If the target company has made a reservation in its balance sheet for pension liabilities, it must be investigated if the proposed transaction will have any material effect on any existing credit insurance arrangements which safeguard the pension liability. If the credit insurance company cancels the credit insurance policy, the pension debt may become payable which can cause cash-flow complications for the employer

As unfunded pension liabilities may not become apparent until a long period after a transaction has been completed, it may sometimes be worth considering for a purchaser to valuate any possible risks and to renegotiate the purchase price instead of requesting a guarantee or an indemnification


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Questions / Answers


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Contacts

Florence Dupont-FargeaudPartner

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Assistant : +33 (0)1 53 57 71 91Tel. : +33 (0)1 53 57 71 [email protected]

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Fredrik GustafssonAdvokat / Associate

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mailto:[email protected]

http://www.vinge.se/

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Employment and Labour complications in due diligence investigation and acquisition

Pensions

© de pardieu brocas maffei a.a.r.p.i. employment and labour complications in due diligence...

Documents

pension schemes likely

pension undertakings

pension promise

level of pension

supplementary pension

state pension scheme

collective pension dc

pension insurance policies