Can trustees derail an M&A deal?
New statistics from the Office for National Statistics pointing to a ‘sizeable’ increase in the value of successful M&A deals, both domestic and cross-border, in the third quarter of 2017, suggests a promising outlook for the market as we head into the New Year. Anecdotally, those of us involved in the industry have certainly noticed an uptick in the number of successful transactions over the last year and the market appears to be more buoyant.
Also anecdotally, those of us the pensions sphere have noted an increase in the number of M&A deals where defined benefit pensions have been involved and have not, as in the past, derailed the deal as a whole. Businesses are getting better at managing the issues around dealing with the trustee of the pension scheme who has the interests of the scheme and its members front of mind.
Trustees have become increasingly aware of their ability to affect M&A deals. Recent comments from the Parliamentary select committee on work and pensions and consequent comments from the Pensions Regulator, they may well seek payments into the pension scheme or first charge security simply because a transaction is taking place.
The trustees have a good reason for this position as the transaction can cause real issues for a pension scheme. The fact is that most schemes run with significant deficits, and their trustees have to have an eye on the ability of the business to fund the scheme and the level of protection to the scheme going forward if the employing company gets into difficulties.
In law, trustees can't actually stop a deal in its tracks. However, the trustees can definitely disrupt and delay the process in a number of ways.
Most straightforwardly, trustees can use their powers to demand payments into the scheme. Some trustees have powers to make one-off demands under the scheme rules, but all have the right to negotiate a scheme valuation (with attached contribution plan) every three years, and call an early one if they have concerns about the viability of the company.
Should trustees be concerned about the business once a deal is completed, they need to assess the scheme funding in a more prudent (i.e. expensive) way, and will negotiate for the deficit to be repaid at a faster rate. Angry trustees will cost money down the line even if you ignore them in the process of the deal itself.
Even more disruption is caused if the trustees manage to get the Pensions Regulator involved. The Regulator can, in certain circumstances, demand payments from directors and shareholders into a pension scheme – if the deal has materially damaged the trustee’s position as a creditor, the Regulator may have grounds for doing that.
In reality, the Regulator doesn’t often resort to these powers. Yet there is still a significant risk that they will threaten to use them, especially if it looks like the trustees’ concerns are being ignored. This could mean the termination of a deal as the threat of such powers could deter most well-informed buyers.
Ultimately, the most significant weapon that trustees have in their armoury is their ability to publicise their concerns about a deal. Trustees can communicate their concerns to the Regulator, to the bidders involved and even to shareholders.
Unhappy trustees can make the risks and liabilities a bigger concern for parties, though on the other hand, happy and engaged trustees can provide the comfort a purchaser needs to get the deal across the line. A sensible engagement with a trustee’s concerns can ensure that pensions issues are not a last minute problem in getting a transaction across the line.
Rosalind Connor, Partner, ARC Pensions Lawv