M&A Post McCutchen

Yesterday, I wrote about US Airways v. McCutchen. Today, I consider another practical application.

For those who didn't read yesterday's post or have already forgotten, McCutchen was clear in telling us that in the case of employee benefit plans, unambiguous plan provisions are controlling. What we also learn is that where plan provisions are ambiguous, well, we don't know exactly what we learned.

Now, let's consider the M&A world. Typically, when one organization is looking at buying another, a due diligence process starts. The acquiring company and its representatives (attorneys, accountants, consultants, etc) review documents, properties, and virtually everything else of any value that the potential acquisition may have. Typically, among the last of those elements to be reviewed are those that may fall under human resources, among them compensation and benefits programs.

Let's go back to McCutchen. Suppose the proposed deal is a stock sale, one in which the acquirer purchases the assets and liabilities of the other company. Among those liabilities are any resulting from benefits and compensation programs. Suppose one of the plans has terms that are vague. Further suppose that there is no particular documentation of the interpretation of those vague terms.

In my experience, representations and warranties frequently do not protect against such an occurrence. Consider a defined benefit pension plan. If the acquiring company has the opportunity to review all the documents and does, but in the case of this plan spends its time reviewing the results of actuarial calculations, what happens if the actuary is taking a reasonable, but incorrect interpretation of vague plan provisions. Perhaps the interpretation is based on the explanation of a benefits manager who retired years ago. Perhaps there is little if any documentation.

In a post-McCutchen world, this could be problematic. Perhaps the plan's obligations are larger than the acquirer has reason to know.

How can the acquiring company deal with this? During due diligence, review the plan provisions side-by-side with determinations of benefits. If every provision seems clear and the benefits determinations seem to confirm this, then things are probably just fine. If they are not, take particular care before the deal is done.

Again, typically, this sort of review is done by attorneys and accountants. Typically, neither has any experience with plan administration and often, neither has experience with actual determination of benefits. Ask an expert for help.