Don't Let Benefits Issues Adversely Affect M&A ROI

There are numerous employee benefits matters that can require time to resolve and delay closings, such as union employees and union contracts, employees on leave, payroll and benefits enrollment elections, and the effect of the transaction on nonqualified deferred compensation plans, executive compensation arrangements, bonus and incentive programs, and stock option and other stock plans.

This article from Faegre & Bensonstresses that although benefits issues can be expensive, complex, and time­ consuming, they generally will not derail a transaction if they are timely investigated and negotiated, stating:

"Deal negotiators need to focus first on the benefits issues which have the potential to create liabilities for their companies. The most expensive employee benefits issues usually involve continuity of health care benefits, retiree benefits, severance benefits, paid time off such as vacation and sick leave benefits, underfunded defined benefit plans, and requirements for the buyer to maintain the same benefits after the transaction." and

"Three main factors that impact the resolution of benefits issues in a transaction are: (1) the size and employee headcount of the buyer and the seller, (2) whether the seller cares what happens to the affected employees, and (3) the type of transaction (e.g., asset sale, stock sale, or merger).

For example, if the transaction is the sale of a subsidiary or a division of one large company to another large company, and both companies continue to exist after the transaction, it is likely that the companies will have similar benefit plans and the benefits issues will be driven by the differences between the plans and the companies' cultures. However, if an entire small company is being sold to a large company, the benefits will most likely be very different and the involvement of the buyer in seller's benefit plans will be significantly higher since the seller will no longer exist post-closing. By contrast, if the transaction is a spinoff from a large company, the benefits issues will revolve around whether the spinoff can continue to maintain the elaborate and expensive plans of the seller.

The size, employee headcounts and corporate cultures of the parties will drive the employee benefit decisions and the details of how those decisions will be accomplished. How those decisions need to be documented and how much protection needs to be included in the parties' agreement will be driven by the type of transaction. It is more important to reach agreement on the employment of the employees and their continuing benefits than it is to agree on the benefits representations and warranties."