By Carol Buckmann
The multiemployer pension system seems to be in perpetual crisis. Many plans are in precarious financial condition, and Congress is considering yet another fix. Meanwhile, plan trustees have become increasingly litigious as they seek to recover from deep pockets after there has been a withdrawal, and some courts have been backing them up. If you are negotiating to buy a business with multiemployer plan contribution obligations, here are some issues to keep on your radar screen:
Do You Have a Withdrawal Liability Estimate?
By law, contributing employers can get one estimate a year, but if the seller hasn’t requested one, the plan can take more time to provide it than may be available for your deal. Consider having an independent actuary prepare an estimate to quantify your exposure taking into account anticipated changes in the plan’s funding status.
Could the Liability Actually Be Lower?
Employers may challenge a plan’s withdrawal liability methodology. For example, in a recent federal district court decision involving the New York Times Company, the New York Times Company successfully challenged a plan’s use of the so-called “Segal-blend” interest rate to determine withdrawal liability. That rate combines the plan’s assumed investment return rate with the lower PBGC interest rate to lower the interest rate used to calculate withdrawal liability, which results in a higher liability assessment than using the plan’s investment return assumption. Other courts may be willing to follow that decision, and there may be other bases for questioning the plan’s estimate or challenging an assessment of withdrawal liability.
Is the Plan’s Status Expected to Change?
The Mulitemployer Pension Plan Reform Act establishes funding zones for multiemployer plans, sometimes referred to as the green, yellow and red zones. The important issue here is that contributions can increase, even if the union workforce doesn’t, if the plan’s funding status deteriorates and it slides into a lower zone. Your actuary should be able to advise about this as well.
Could You have Successor Liability?
Buyers in a stock sale assume the liabilities of the business. However, buyers often assume that if they don’t specifically agree to assume multiemployer obligations in the deal documents, and there is an asset sale, they have effectively disclaimed liability. They are forgetting about the labor law doctrine of successorship, which was recently applied under Title IV of ERISA in the Seventh Circuit’s ManWeb litigation.
If the buyer has assumed and continues the seller’s business, the buyer can be deemed to be a successor to the seller and responsible for its liabilities. The ManWeb court found that the buyer was a successor because it knew about the potential liability and took over assets, top management and customers of the seller, even though the buyer had other businesses and the assumed business was only a small part of its operations.
Will You Have a 4204 Transaction?
This helps the seller avoid withdrawal liability in an asset sale, but it requires the buyer to assume the seller’s 5 year contribution history. This may result in higher liability for the buyer if the buyer later withdraws from the plan. The seller will otherwise have a withdrawal at the time of the sale.
What About Controlled Group Liability?
ERISA provides that all members of a controlled group are jointly and severally liable for withdrawal liability. This means that all of the liability can be asserted against any member of the group. Liability is not limited to assets of the withdrawn employer. A buyer taking over a business may be liable for unpaid withdrawal liability under any plan from which a member of seller’s controlled group withdrew prior to the closing.
Even non-U.S. members of the group can also be exposed to liability, assuming that courts can get jurisdiction. Multiemployer plans have also proceeded against private equity fund investors to attempt to collect unpaid withdrawal liability, based on the PBGC’s position that private equity funds operate a trade of business.
For all these reasons, the best advice for purchasers of a business with potential withdrawal liability is caveat emptor.