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© De Pardieu Brocas Maffei A.A.R.P.I. Employment and Labour complications in due diligence investigation and acquisition Pensions.

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Presentation on theme: "© De Pardieu Brocas Maffei A.A.R.P.I. Employment and Labour complications in due diligence investigation and acquisition Pensions."— Presentation transcript:

1 © De Pardieu Brocas Maffei A.A.R.P.I. Employment and Labour complications in due diligence investigation and acquisition Pensions

2 © De Pardieu Brocas Maffei A.A.R.P.I. SUMMARY I – Differences between mandatory and voluntary pension schemes II – Differences in pension undertakings III – Various approaches to safeguarding: pension insurance or reservation of liability in the employers balance sheet IV –How does an M&A transaction affect pension liabilities and collateral for pension liabilities. V – How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the sellers handling of pension issues? Employment and Labour complications in due diligence investigations and acquisition Vinge

3 © De Pardieu Brocas Maffei A.A.R.P.I. I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition 3 Vinge

4 © De Pardieu Brocas Maffei A.A.R.P.I. I - Differences between mandatory and voluntary pension schemes The pension schemes likely to come up in an M & A transaction are in France and in Sweden: 1.1 State pension scheme in France Covers all employees Funding: contributions paid both the employer and the employee Pay-as-you-go system Safeguarding: no liabilities for employers, except paying the contributions Employment and Labour complications in due diligence investigations and acquisition Vinge

5 © De Pardieu Brocas Maffei A.A.R.P.I. I - Differences between mandatory and voluntary pension schemes 1.1 bis - Public pension scheme in Sweden Covers all employees Funding: contributions paid by the employer solely through payment of statutory social security charges Safeguarding: no liabilities for employers, except for paying the contributions Employment and Labour complications in due diligence investigations and acquisition Vinge

6 © De Pardieu Brocas Maffei A.A.R.P.I. I - Differences between mandatory and voluntary pension schemes Mandatory supplementary schemes in France: ARRCO and AGIRC Covers all employees: ARRCO covers non-executives employees, and also executives employees on the so-called Tranche A of the social security ceiling (currently euros) AGIRC covers executive employees and assimilated executives (called Art.36) Funding: contributions paid both by the employer and the employee Pay-as-you-go system Safeguarding: no liabilities for employers, except paying the contributions Employment and Labour complications in due diligence investigations and acquisition Vinge

7 © De Pardieu Brocas Maffei A.A.R.P.I. I - Differences between mandatory and voluntary pension schemes bis - Mandatory supplementary pension schemes in Sweden: There is no statutory requirement to provide supplementary pension scheme benefits in Sweden However, the working conditions on the Swedish labour market, including employees entitlement to supplementary pension benefits, is traditionally regulated by collective bargaining agreements (approximately 90% of all employers are bound to apply collective bargaining agreements) The most predominant supplementary occupational pension schemes on the Swedish labour market are the ITP pension scheme (DB/DC for white collar employees) and SAF-LO Collective Pension (DC for blue collar employees) Supplementary pension schemes under CBAs are financed by the employer solely and safeguarded through payment of pension premiums and/or credit insurances Employment and Labour complications in due diligence investigations and acquisition Vinge

8 © De Pardieu Brocas Maffei A.A.R.P.I Voluntary pension schemes in France Covers all employees or a specific category of employees, often granted to senior executives Defined contributions: level of pension is not guaranteed, or Defined benefit: pension promise based generally on service and salary to top up the mandatory pensions 2 types of benefit schemes I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

9 © De Pardieu Brocas Maffei A.A.R.P.I bis - Voluntary pension schemes in Sweden Subject to individual agreement between the employer and the employees. Normally applied for employees who are not covered by any CBA or higher executive employees Individually agreed pension schemes are usually DC which are financed and safeguarded through pension insurance policies taken out with insurance companies I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

10 © De Pardieu Brocas Maffei A.A.R.P.I Individual savings schemes in France PERCO: Specific savings scheme enabling employees to build up, with the help of the employer, additional income at the time of their retirement through a life annuity or a capital Funding: Employees may contribute their voluntary and mandatory profit sharing, sums invested in a company savings plan and voluntary payments Employers contributions are a fixed amount subject to ceilings: 16% of the annual social security ceiling (i.e. up to 5.656,32 euros) Liability of the employer is to pay the contributions provided in the plan I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

11 © De Pardieu Brocas Maffei A.A.R.P.I. 11 Company savings time scheme: Scheme granting employees rights to paid leave by accumulating time or money, such as holiday leave or overtime hours to possibly allow early retirement or complementary benefits on retirement. Possible contribution of the employer I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

12 © De Pardieu Brocas Maffei A.A.R.P.I bis - Individual savings scheme in Sweden Individual pension savings scheme in Sweden are normally not related to the employment, but rather a private matter for the individual employee According to some CBAs and under some individual employment agreements, the individual employees may be allowed to make salary deductions in return for cost-neutral supplemental pension premiums paid by the employer to the existing occupational pension scheme or a separate supplementary pension scheme Due to lower employers tax rate on pension premiums compared to payments of salary, a cost neutral salary deduction for the employee will result in a pension premium paid by the employer which higher comared to the salary deduction Individual savings scheme are normally DC I - Differences between mandatory and voluntary pension schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

13 © De Pardieu Brocas Maffei A.A.R.P.I. II - Differences in pension undertakings Employment and Labour complications in due diligence investigations and acquisition 13 Vinge

14 © De Pardieu Brocas Maffei A.A.R.P.I French ARRCO and AGIRC schemes On an industry-wide basis, implemented through private non-profit legal entities that serve the general interest The non-profit legal entity and the rates of contribution or allocation of such rate between employer and employee could be determined by branch collective bargaining agreement If not, employer chooses the level of contributions between a minimum and a maximum threshold II - Differences in pension undertakings Employment and Labour complications in due diligence investigations and acquisition Vinge

15 © De Pardieu Brocas Maffei A.A.R.P.I Voluntary schemes in France Either individually agreed, or by collective bargaining agreement, or unilaterally by the employer, or by referendum (more rare in practice) Contributions paid generally only by the employer II - Differences in pension undertakings Employment and Labour complications in due diligence investigations and acquisition Vinge

16 © De Pardieu Brocas Maffei A.A.R.P.I Individual savings schemes in France PERCO Either implemented through a company collective agreement, or via an agreement with the works council or by ratification of 2/3 of the staff Specific rules apply for the management of the funds collected and to the kind of investments which may be made under this scheme to preserve the security of the savings Company savings time scheme Either by branch agreement or by company collective agreement, employer must preserve the acquired rights in this scheme II - Differences in pension undertakings Employment and Labour complications in due diligence investigations and acquisition Vinge

17 © De Pardieu Brocas Maffei A.A.R.P.I Voluntary schemes in Sweden Individually agreed or unilaterally established by an employer as a result of a benefit policy Defined contributions/defined benefits: contributions paid only by the employer For higher executives: direct pension arrangements may be financed and safeguarded by the employer through an endowment insurance policy which has been pledged to the employee II - Differences in pension undertakings Employment and Labour complications in due diligence investigations and acquisition Vinge

18 © De Pardieu Brocas Maffei A.A.R.P.I. III - Various approaches to safeguarding: pension insurance or reservation of liability in the employers balance sheet Employment and Labour complications in due diligence investigations and acquisition 18 Vinge

19 © De Pardieu Brocas Maffei A.A.R.P.I. 19 III - Various approaches to safeguarding: pension insurance or reservation of Liability in the employers balance sheet 3.1 State and mandatory supplementary schemes in France Payment of contributions are directly in the charges of the company and recorded as such in the employers balance sheet 3.2 Voluntary schemes in France Defined contributions scheme: always to an external company, in general an insurance, mutual or welfare company Employment and Labour complications in due diligence investigations and acquisition Vinge

20 © De Pardieu Brocas Maffei A.A.R.P.I. 20 Defined benefit scheme: Self administered and unfunded: in such a case pensions are paid out by employer out of its cash flow and therefore correct valuation is key OR payment to a separate fund. Reserve not mandatory under French law when internal funding, but liabilities must appear in an annex to the balance sheet III - Various approaches to safeguarding: pension insurance or reservation of Liability in the employers balance sheet Employment and Labour complications in due diligence investigations and acquisition Vinge

21 © De Pardieu Brocas Maffei A.A.R.P.I Individual savings schemes in France PERCO : investment funds Company savings scheme: insurance or financial guarantee to be defined in the agreement implementing such scheme III - Various approaches to safeguarding: pension insurance or reservation of Liability in the employers balance sheet Employment and Labour complications in due diligence investigations and acquisition Vinge

22 © De Pardieu Brocas Maffei A.A.R.P.I.22 III - Various approaches to safeguarding: pension insurance or reservation of Liability in the employers balance sheet Safeguarding of State and mandatory supplementary schemes according to CBAs in Sweden Payment of charges to the statutory public pension scheme is made through the employers payment of social security charges The predominant supplemental occupational pension schemes under CBAs in Sweden are safeguarded either by payment of premiums to external insurance companies; or a reservation for the accrued pension debt in the employers balance sheet combined with a credit insurance taken out by the employer more rarely, the employer may safeguard pension liabilities through establishment of a separate pension trust which holds assets corresponding to the employers pension liability Employment and Labour complications in due diligence investigations and acquisition Vinge

23 © De Pardieu Brocas Maffei A.A.R.P.I. IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? Employment and Labour complications in due diligence investigations and acquisition 23 Vinge

24 © De Pardieu Brocas Maffei A.A.R.P.I. 24 IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? 4.1 M&A transaction effects on pension liabilities in France Share transfer No effect on State pension scheme, and mandatory supplementary schemes No effect on voluntary and individual schemes Employment and Labour complications in due diligence investigations and acquisition Vinge

25 © De Pardieu Brocas Maffei A.A.R.P.I. 25 IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? Asset / business transfer / merger State pension scheme and mandatory supplementary schemes Pension rights under mandatory supplementary schemes are portable through successive employers and in general do not raise specific issue when a transaction occurs Merger : it may be necessary for the absorbing company to harmonise the rates of contribution except if the merged company remains as a distinct establishment of the absorbing company. Changes of contribution requires approval of the employees Employment and Labour complications in due diligence investigations and acquisition Vinge

26 © De Pardieu Brocas Maffei A.A.R.P.I. 26 CBA: Former agreement does not transfer but continues to apply (financing, acquisition and liquidation of rights, liabilities) during a maximum 15 months period during which the employer must negotiate a new agreement. Such consequences will depend upon whether or not the new employer has a similar scheme: If similar scheme: problem of harmonisation If no scheme and new employer does not want to continue: problem of definition of accrued right benefits (active/inactive employees) IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? For voluntary & individual schemes Consequences depend upon the method of implementation Employment and Labour complications in due diligence investigations and acquisition Vinge

27 © De Pardieu Brocas Maffei A.A.R.P.I. 27 IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? Referendum: Same rules Unilateral decision of the employer: Possibility to terminate subject to a sufficient notice, consultation of employee representatives and written information of employees Individually agreed: Express consent of the employees required Employment and Labour complications in due diligence investigations and acquisition Vinge

28 © De Pardieu Brocas Maffei A.A.R.P.I.28 IV - How does an M&A transaction affect pension liabilities and collateral for pension liabilities? M&A transaction effects on pension liabilities in Sweden Share transfer A share transfer transaction does not affect the pension liabilities of the target company towards its employees, and the current pension arrangements will normally remain unchanged after the transaction Asset transfer In case of an asset transfer, the acquiring entity will normally assume the responsibility to provide the same benefits as the seller entity with respect to pension undertakings going forward from the transfer date. Pension liabilities accrued prior to a transfer of assets does not normally transfer to the acquiring entuity, but will remain with the seller. If the seller is bound by a CBA which prescribes a specific pension scheme, then the buyer entity will become obliged to apply the same pension scheme by default of law, unless the CBA is terminated prior to the asset transfer, or if the buyer is bound by another CBA pension scheme Employment and Labour complications in due diligence investigations and acquisition Vinge

29 © De Pardieu Brocas Maffei A.A.R.P.I. V - How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the sellers handling of pension issues? Employment and Labour complications in due diligence investigations and acquisition 29 Vinge

30 © De Pardieu Brocas Maffei A.A.R.P.I. 30 V - How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the sellers handling of pension issues? In general, from the French perspective, negotiation of a warranty to establish that: Contributions have been duly paid for mandatory schemes, and On the existence and level of funding of any voluntary arrangement. It may require to cover exactly the beneficiaries, the rate and amount of contributions, and premiums paid, latest actual valuation Guarantee of any transfer of value issue could be key, or negociation of a reduction of the purchase price Employment and Labour complications in due diligence investigations and acquisition Vinge

31 © De Pardieu Brocas Maffei A.A.R.P.I. 31 For defined benefit arrangement, it may be secure to have an actuary reviewing the funding of the scheme, or whether any reserve in the accounts is sufficient Actuarial valuation will also be required for any transfer of assets/value for retirement liabilities agreed between the parties. Particular attention should be given to schemes terminated by the former employer to ensure the absence of possible liabilities if the scheme has not been correctly terminated. V - How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the sellers handling of pension issues? Employment and Labour complications in due diligence investigations and acquisition Vinge

32 © De Pardieu Brocas Maffei A.A.R.P.I.32 V - How to provide adequate protection in an M&A agreement for a purchaser in case of uncertainties with the sellers handling of pension issues? Comments from a Swedish perspective: It is generally recommended to get access to direct communication with target company representatives to fully understand the existing pension arrangements, as written documentation provided in data rooms not always gives adequate information If the target company has made a reservation in its balance sheet for pension liabilities, it must be investigated if the proposed transaction will have any material effect on any existing credit insurance arrangements which safeguard the pension liability. If the credit insurance company cancels the credit insurance policy, the pension debt may become payable which can cause cash-flow complications for the employer As unfunded pension liabilities may not become apparent until a long period after a transaction has been completed, it may sometimes be worth considering for a purchaser to valuate any possible risks and to renegotiate the purchase price instead of requesting a guarantee or an indemnification Employment and Labour complications in due diligence investigations and acquisition Vinge

33 © De Pardieu Brocas Maffei A.A.R.P.I. 33 Questions / Answers Employment and Labour complications in due diligence investigations and acquisition Vinge

34 © De Pardieu Brocas Maffei A.A.R.P.I. Fax :33 ( wContacts.de-pardieu.com 34 Contacts Florence Dupont-Fargeaud Partner 57 avenue d'Iéna - CS Paris Cedex 16 Assistant : +33 (0) Tel. : +33 (0) Advokatfirman Vinge KB Direct line Phone Mobile FAX Smålandsgatan 20 Box Stockholm Sweden Fredrik Gustafsson Advokat / Associate Vinge

35 © De Pardieu Brocas Maffei A.A.R.P.I. De Pardieu Brocas Maffei A.A.R.P.I. – 57 avenue dIéna – CS – Paris Cedex 16 – T: +33 (0) – F: +33 (0) – Employment and Labour complications in due diligence investigation and acquisition Pensions


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