Asset Purchase

[Madison71]

This is purely hypothetical but I want to make sure I have this right if it ever comes up in the future.

Company A sponsors a DB plan that is underfunded. They are looking to sell their company. Company B offers to buy Company A through asset purchase. Upon review of Company A's plans, Company B realizes that Company A's defined benefit plan is significantly underfunded. Company B goes through with the asset purchase with language in the agreement making it clear that they are not assuming any plans.

Company A proceeds to begin termination of the DB plan and files with PBGC upon the asset sale to Company B. Company A does not have enough money to meet the undefunded obligation.

What risk if any does Company B have?

Thank you!

[Mike Preston]

It seems the risk relates to the PBGC coming in and determining that A didn't receive full value from B.

[J Simmons]

Particularly in the 7th Circuit, the US Court of Appeals and District Courts have begun to develop a body of federal common law around the concept of successor employer liability even in the context of an asset purchase. This is a concept borrowed from the FLSA, and does not require commonality of ownership as many state law doctrines of successor corporate liability do. So B could perhaps be held liable even if it paid fair and full value for the assets of A. The parameters outlined in those cases should be examined, and perhaps the transaction structured around falling into that trap.

[Madison71]

So during due diligence in an asset purchase, you want to pay particular attention to an underfunded DB plan and take that into consideration in purchasing the company? Should Company B increase its purchase price to cover this? I would argue that Company A should have been aware that Company B's purchase price was too low to cover making up the funding shortfalls upon termination.

Thanks for your help!

[Madison71]

J-Simmons. I will check out the 7th Circuit cases. Thank you. Any other circuits you know of with similar results?

[SoCalActuary]

It seems to me that Company B should buy the assets for what they perceive their worth to be.

Company A has the liability, and needs to assure that the plan is properly wrapped up from the proceeds of the sale or their other capital sources.

If Company A walks away from their pension liability, then those stakeholders are solely responsible for the promises they made and for any PBGC consequences.

But, I am not a lawyer, and my opinion is worth the price you just paid for it.

[J Simmons]

Madison71,

In February 2007, the law firm Paul Hastings conducted a web seminar entitled Successor Liability for Benefits in Asset Sales. If you e-mail me privately, I can provide you the outline of that presentation as well as case law that I have on the topic.

[Madison71]

Madison71,

In February 2007, the law firm Paul Hastings conducted a web seminar entitled Successor Liability for Benefits in Asset Sales. If you e-mail me privately, I can provide you the outline of that presentation as well as case law that I have on the topic.

I emailed you privately. Thank you.