Canada's uncertain pension plan merger landscape underscores the need for local expertise, says Mitch Frazer in Lexpert

June 01, 2008

With their potential to halt negotiations, human resource components of transactions in Canada have moved to the foreground.

For example, in M&A deals, pension liabilities, retiree benefits and long-term incentive compensation can have an impact on the purchase price, while the retention of key people in the target company is critical to acquirors.

Increasing numbers of large cross-border and multijurisdictional transactionswhich present both cultural and legal considerationsrequire Canadian corporate law firms to have strong human resource-related practice areas. Canadian and U.S. employment laws differ greatly, with Canadian employment conditions and benefits seen as being more generous. Canada's courts also have little tolerance for elaborate corporate restructurings that undermine successor rights and collective bargaining rights.

Specialized advice is key, especially in the area of pension due diligence. "Failing to get the proper purchase price adjustment for pension considerations can easily knock all the business modelling off," says Mitch Frazer.

The growing profile of pension considerations is not new to Canadians, who witnessed the dramatic impact of pension liabilities in various recent transactions, including in the restructurings of Air Canada, Algoma and Stelco; in the latter, the size of the pension funds exceeded that of the enterprise. There is also a growing wariness about whether the actuarial assumptions that underlie pension plans are reasonable.

"If there's any doubt about how important pension considerations have become worldwide, consider the situation in England, where there's a very activist regulator who has few qualms about actually stopping a deal which it regards as unfair," says Mitch. "Seven or eight years ago, you might have some deals where lawyers who were not pension experts would deal with the issue, but you never see a major deal anymore where a pension exists and a pension expert isn't involved. It doesn't matter if it's a merger or an insolvency because pension legislation doesn't distinguish the two, and dealing with either is more or less the same thing from a mechanical perspective."

In pension due diligence, defined benefit (DB) and defined contribution (DC) pension plan issues are becoming prominent. "Employees are suing plan sponsors for failing to provide adequate investment choices and diversity," says Mitch. "A lack of clarity in the case law, combined with minimal legislation and restrictive policies established by regulatory bodies, has created a hazy legal environment for pensions in Canada."

Pension legislation in Canada does not deal extensively with plan mergers or asset transfers. "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," says Mitch.

An Ontario Court of Appeal case, Lennon et. al. v. Rockwell Automation Canada Inc., is among those that have clarified that Ontario legislation does not require the regulator to refuse approval for a transfer that does not protect members' interest in surplus; surplus is not a "benefit" under the Pension Benefits Act.

"The case implies that plan members have no interest in actuarial surplus while a pension plan is ongoing, and that surplus ownership is not to be taken into account at the time of merger," says Mitch. "Plan sponsors should be aware that a situation with less favourable facts may not yield the same results as Baxter [v. Ontario (Superintendent of Financial Services)] and Lennon, and that decisions are still on a case-by-case footing."

The Supreme Court of Canada's 2006 decision in Buschau v. Rogers Communications Inc. countered a trend favouring employees in pension cases, and represented a victory for plan administrators. The court ruled that the trust law principles enunciated in another case, Saunders v. Vautier, could not be readily applied in the complex context of pension law.

"Buschau eased the strict application of trust law principles in the pension context and confirmed that pension trusts are different from traditional trusts," says Mitch. "Equally important is the deference shown to the pension legislation, especially the recognition that legislative mechanisms for dealing with issues such as plan termination and distribution of surplus assets take precedence over trust rules."

The jurisprudence remains complex. Says Mitch: "The uncertain Canadian landscape regarding pension plan mergers underscores the necessity for local expertise and a unique understanding of national statutory and regulatory regimes."


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