Jump to content

401(k) Plan as a Party to Sale Agreement?

Recommended Posts

Purchaser wants seller's 401(k) Plan to be included as party to an asset purchase agreement. The 401(k) holds a significant amount of seller's stock and purchaser wants the 401(k) plan (or trust I presume) to be party the the agreement as a shareholder. This would include the Plan making reps and warranties related to seller's business.

Is this allowed? I have significant concerns with this - first from a fiduciary duty standpoint, but also because the plan cannot make reps and warranties related to the business as the Plan has no knowledge. But purchaser's counsel is pushing back. 

Has anyone seen this before? Am I off base? 


Link to comment
Share on other sites

Who is the trustee of the plan or the investment fiduciary?  Years ago when I did retirement work, the company I represented had senor management (including the CFO) on the 401(k) investment committee.  That committee clearly was a fiduciary and that committee could have realistically made  the reps and warranties related to the 401(k) sponsor's business.  (that committee was never asked to give reps and warranties but I was concerned when there was a tender offer and I made sure that the investment committee hired an independent consultant to review the tender offer.)   If the buyer is really pushing, look to who in the plan's fiduciary structure is in the position to provide accurate reps and warranties.  

Link to comment
Share on other sites

If you or other counsel for the seller don’t persuade the purchaser to relent, there are some methods for lessening an exposure. Among them:

Depending on the statement to be made, offer a representation but not a warranty. Or offer a warranty but not a representation. It’s unclear what consequences might result from these distinctions, but some lawyers believe there are possibly different remedies for an inaccuracy in one or the other and that the lingo used might influence a court’s or arbitrator’s interpretations about remedies.

Even better, specify exactly which remedies do or don’t apply for an inaccuracy of either (or any) kind of statement or promise.

Limit a warranty or a representation to its maker’s actual knowledge.

Define what is in out of the maker’s knowledge.

Rewrite an assurance as a statement about not knowing. For example, compare “The Plan warrants that the Seller’s agreements with the Customers are legally enforceable according to their written terms.” with “The Plan warrants that the Plan has no Knowledge that the Seller’s agreements with the Customers are not legally enforceable according to their written terms.”

Put a time limit on remedies for a breach of a warranty or representation.

In the text, recite: “Each warranty or representation made by the Plan is void to the extent ERISA § 410(a) provides.” While that law applies even if the text is silent, it might help to preserve an argument that a party to the agreement knew that ERISA § 410(a) might affect something.

And consider whether a remedy against the seller’s plan might be impractical, especially if the seller will terminate the plan before the asset-purchase closing or soon after.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



Link to comment
Share on other sites

  • 2 weeks later...

If the plan is a shareholder it will need to make all of the same reps and warranties as any other shareholder. These can be limited to actual knowledge, which the the plan fiduciary may or may not (but probably does) have. But mostly what the buyer wants is the selling shareholder's agreement that certain financial penalties will apply if some of the reps are untrue.

Of course, in order to protect the plan's fiduciaries and potentially other parties, the plan may need its own counsel. And I am not addressing here whether, based on facts and circumstances not included in your question, kmhaab, there may be prohibited transactions possible

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

You might also look into how these issues are addressed in private company ESOP sale transactions. The dynamics are very similar - a qualified plan owns all or a large portion of the company's stock - and the same issues arise frequently. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Create New...