M&A from a superannuation perspective

By Jane Paskin.

Key Points:
Mergers and acquisitions raise issues that are not usually sufficiently anticipated by investors, and consequential employee entitlements can be the unexpected sting in a sale transaction.

Mergers and acquisitions raise important employee benefit issues for Australian superannuation lawyers. In fact, this is an area of legal practice where superannuation and workplace relations law intersect, requiring lawyers in both fields to work closely together.

Sale of shares or sale of business?

The first investigative question to answer is whether the structure of the proposed sale is a sale of shares or a sale of a business. This is important because the two types of transactions have dramatically different effects upon the transferring employees' contracts of employment. For the sale of business, these contracts are technically terminated. For the sale of shares, on the other hand, these contracts are left in tact. This technical difference fundamentally impacts on the terms of superannuation entitlements for the transferring employees that the buyer and seller can - and cannot - negotiate.

Share sale of company

The sale of the shares in an employer company does not, of itself, result in the termination of the employees' contracts of employment. The employer company being sold continues to have obligations to make contributions to its employees' superannuation fund. However, in the context of corporate superannuation funds (especially defined benefit corporate funds with either a deficit or surplus), allowing the employer company to continue to participate in the group's corporate superannuation fund will, generally speaking, not be acceptable to the seller.

It is quite possible that the terms of the superannuation fund will give the principal sponsoring employer (normally the seller) a right to, in effect, terminate a participating employer's participation in the trust. Upon the sale of the employer company when these terms exist, it is usual for the sale agreement to include a provision that the seller has an obligation to give written notice to the relevant participating company (the subject of the share sale) so as to trigger it ceasing to be a participating employer of the superannuation trust fund.

In the negotiating/due diligence phase of the sale transaction, it is also necessary to carefully read the terms of the relevant superannuation fund's trust deed so as to identify if there are any rules of the trust which provide that a participating employer in the trust fund ceases being such an employer if it is no longer a member of a relevant group of companies. Such a rule in the trust deed will prevail over any competing terms of a competing deed thus the importance of ascertaining the effect of such a rule is obvious. For example, it may be that the rule provides that, firstly, the employees/members employed by the participating company being sold have their equitable share of the trust fund separated from the other assets of the trust and then, secondly, that proportion of the fund is subject to a wind up clause. If the fund has either a surplus or a deficit, the result of this rule may have an impact on the purchase price of the employer company shares.

If the seller's fund is an industry and/or retail fund providing defined contribution benefits, it is not unusual for the buyer to agree to continue the superannuation arrangements unaltered post sale. In other words, nothing changes for the relevant employees in relation to their superannuation entitlements, the main issue in the negotiations being whether the seller has met its superannuation obligations in relation to them. If the seller has not done this, there may be a tax liability or other exposure that the buyer needs to be aware of before the sale is completed.

Sale of business

A sale of a business division of a participating company results in a technical termination of the transferring employees' contracts of employment and therefore the terminated employees are entitled to a payout from their superannuation fund. [1]

It is crucial for superannuation lawyers to analyse the terms of the trust to identify whether the employees are entitled to greater benefits than would be the case if they had voluntarily left their employment. Such a term, especially in older style trust deeds, can be hidden in the redundancy provisions. Further, it must not be forgotten that in a sale of business (as opposed to a share sale), a technical redundancy is most likely to arise.

If the seller's fund is a defined benefit fund, it may be that the buyer will wish to use the technical termination of employment (and the subsequent offer of a new contract of employment) as a means by which to cease contributing to a defined benefit arrangement and for future benefits to be defined contribution. However, the buyer's desire to change the style of superannuation benefits will generally be in contradiction to the seller's desire to avoid the risk of redundancy payouts by the transferring employees being offered new contracts of employment that, on the whole, are not less favourable to workers than their current contracts.

In this situation, the agreed outcome of the negotiations is generally for the buyer to offer the transferring employees defined contribution benefits. The agreed future contribution rate, together with the amount being transferred will, on balance, most likely produce an outcome that is comparable to the transferring employee's future defined benefit. Such an argument is normally bolstered with an actuarial report that is based on fairly conservative assumptions. The actuarial report would be evidence in any court case should one of the transferring employees wish to argue that they have been made redundant, even where the purchaser makes a new offer of employment, albeit that the terms and conditions of that employment may be different in the superannuation context.

In some sale negotiations, it may be appropriate to take steps to avoid the technical termination of employment triggering benefit entitlements under the terms of the superannuation trust. Most trust deeds provide that transferring employment from one participating employer to another participating employer does not entitle the employee/member to a benefit payment. Therefore, a sale agreement can be sheltered from any resulting employee benefit entitlements from the sale if the buyer becomes a participating employer in the seller's fund prior to the sale's completion.

If a decision is made for the purchaser to become a participating employer in the fund, it will be necessary to take whatever steps are required prior to the completion date. This may mean preparing a deed of participation for the buyer's employer company to execute. Therefore, it can be necessary to enter into discussions with the trustee of the seller's fund while the sale negotiations are continuing.

In some transactions, the buyer will ask to become a participant in the seller's superannuation fund for only a few months after the sale's completion. This may be necessary for the buyer to have adequate time to establish its own superannuation fund that will provide the transferring employees with their future benefit entitlements.

If a decision is made for the buyer to become a participating employer in the seller's fund for a few months post sale, it will be necessary to set out in the sale agreement (and possibly also in the deed of participation between the trustee of the fund and the buyer) the special terms upon which the buyer will be allowed to participate. For example, the length of participation and contribution rates need to be defined. In addition, the mechanism by which the buyer will cease to be a participant should also be set out in the deed. A copy of the deed of participation can form an annexure to the sale agreement. In normal circumstances, the deed of participation needs to be executed before the sale agreement in order for the purchaser to be a participating employer in the fund prior to the technical termination of employment.

Due diligence

In both the sale of a business and the sale of shares, it is important to understand the superannuation entitlements of the transferring employees.

Generally speaking, this involves:

• reviewing the terms of the trust deed;
• reviewing the terms of any industrial instrument that may apply to bargaining employees;
• reviewing contracts of employment of salaried staff;
• reviewing the annual report and the financial statements of the seller's fund;
• reviewing disclosure material given the transferring employees so as to understand representations made to them by either the employer or the trustee;
• making inquiries in relation to correspondence between the trustee and the government regulator over the last two three years; and
• making inquiries and planning the necessary warranties to the effect that the seller has met its superannuation commitments.

Concluding remarks

In a nutshell, mergers and acquisitions raise issues that are not usually sufficiently anticipated by investors. Consequential employee entitlements can be the unexpected sting in a sale transaction. Accordingly, methods to shield purchasers from the result of unexpected entitlements have been flagged. Ultimately, due diligence processes must be utilised in all sale transactions to which employee entitlements may be attached.

This is an edited version of a talk given by Jane at the International Bar Association Conference at Auckland on 27 October 2004. For more information about superannuation, please contact Jane at jpaskin@claytonutz.com.

[1] These benefits are subject to the withdrawal benefit rules (see above).

For further information, please contact Jane Paskin.