The Middle Ground

A GUIDE TO DEAL TERMS IN PLAIN ENGLISH


+ Introduction

+ Purchase and Sale

+ Closing

+ Representations & Warranties - Seller

+ Representations & Warranties - Buyer

+ Covenants

+ Conditions to Closing

+ Indemnification

+ Termination

+ Miscellaneous

Employee Benefit Matters


Classification: Moderately Material
Section: Representations and Warranties of Seller
Negotiation Time: Minimal to Moderate
Transaction Costs: Expensive
Major Impact: Deal Value and Risk Management


What is This? The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading. Here, the Seller provides information regarding employee benefits.

The Middle Ground: The disclosures and representations made by the Seller in this section include:

  1. The disclosure of all “Benefit Plans,” written or unwritten, to which the Seller has contributed or under which the Seller or Buyer may have (or reasonably expect to have) any liability;

  2. That the Seller has provided to the Buyer, for each Benefit plan, accurate and complete copies of the following: (i) the plan documents and amendments for plans that are in writing; (ii) for unwritten plans, a written summary of the material plan terms; (iii) copies of trust agreements or other funding arrangements, insurance contracts, administration agreements, investment agreements, and custodial agreements that are currently in effect or required in the future; (iv) written communications relating to any Benefit Plan, including summaries of plan descriptions and any material modifications to the plan; (v) correspondence from the IRS regarding any Benefit Plan that is intended to be qualified under Internal Revenue Code (the “Code”) §401(a); (vi) a copy of the two most recently filed Form 5500s (if applicable), with attached schedules and financial statements; (vii) recent actuarial valuations for applicable Benefit Plans; (viii) the most recent nondiscrimination tests performed under the Code; and (x) copies of material notices and correspondence from any Governmental Authority relating to the Seller’s Benefit Plans;

  3. Each Benefit Plan (and any related trusts) has been established and maintained in compliance with all applicable laws; nothing has occurred that has subjected or reasonably could subject the Seller or any of its ERISA Affiliates, or the Buyer or its Affiliates, to a penalty or tax under ERISA or the Code; all benefits, contributions, and premiums have been timely paid; and all benefits accrued under any unfunded Benefit Plan have been paid or accrued and reserved for in accordance with GAAP, if the Business follows GAAP;

  4. Neither the Seller nor any of its ERISA Affiliates has (i) incurred any material liability with respect to Title I or Title IV of ERISA or any related Code provisions or local laws; (ii) failed to timely pay premiums to the Pension Benefit Guaranty Corporation; (iii) withdrawn from a Benefit Plan; or (iv) engaged in any transaction that would give rise to liability under §4069 or 4212(c) of ERISA;

  5. With respect to each Benefit Plan: (i) any Multiemployer Plans in which the Seller participates have been disclosed, all premiums have been timely paid, and no withdrawal liability is outstanding or will be incurred upon a future withdrawal from the plan; (ii) no plan is considered a “multiple employer plan” under §413(c) of the Code or a “multiple employer welfare arrangement” under ERISA; or (iii) the Pension Benefit Guaranty Corporation has not taken any action to terminate or appoint a trustee to any such plan; (iv) no such plan is subject to the minimum funding standards or ERISA and none of the Purchased Assets are, or may reasonably be expected to become, subject to a lien arising under ERISA or the Code; and (v) no “reportable event” as defined in ERISA §4043 has occurred with respect to any such plan;

  6. Except as disclosed, no Benefit Plan or other arrangement involving the Seller requires it to provide post-termination or retiree welfare benefits to any individual;

  7. Except as disclosed, there is no pending or, to Seller’s knowledge, threatened Action relating to a Benefit Plan (other than routine benefits claims), and no Benefit Plan has been the subject of an examination or audit by a Governmental Authority or is involved in an amnesty or similar compliance program sponsored by any Governmental Authority;

  8. There has been no change in relation to any Benefit Plan, and Seller has not agreed to make any change in the future with respect to any such plans, that would increase the annual expense of maintaining such plan in comparison to the most recently completed fiscal year. Furthermore, Seller nor its Affiliates have committed to adopt, modify, or terminate any Benefit Plan currently in effect;

  9. Each Benefit Plan that is subject to §409A of the Code has been administered in accordance with that section of the Code and Seller does not have any monetary obligations to any third party in relation to §409A;

  10. Except as disclosed, execution of the Agreement or any transactions pursuant to the Agreement will not materially alter the Business’s obligations arising out of any Benefit Plan.

Purpose: By making these representations, the Seller is accepting the risk of any outstanding liabilities under its benefit plans, including the risk of non-compliance with ERISA or the Code. However, the representations do not relieve the Buyer from potential liability for ongoing violations that persist after the sale, so it should pay special attention to the disclosures made in this section of the Disclosure Schedules if it is adopting the Seller’s plan(s). In terms of deal value, the transaction costs of both parties will increase based on this section because it requires review by a benefits plan expert (or, more accurately, an expert review is highly recommended). However, the experts’ review will limit the risk associated with the Benefit Plan(s), making it a sound investment for both sides.

Buyer Preference: The Buyer may want to retain an employee benefits specialist to determine which of these representations need to be included for each specific situation. In general, the Buyer wants robust disclosure requirements and comprehensive representations that do not include knowledge or materiality qualifiers.

Seller Preference: The Seller may want to retain an employee benefits specialist to assess whether the Seller has been compliant with its plans and to advise as to which representations should and should not be included in the Agreement. In most situations, its interests will be the opposite of the Buyer’s; the Seller will want limited representations that ignore immaterial issues and that are based on the Seller’s knowledge.

Differences in a Stock Sale Transaction Structure: The Buyer will typically want more comprehensive disclosures and representations in a stock sale because the Buyer is assuming the Seller’s liabilities. In an asset acquisition, liabilities relating to any Benefit Plan of the Seller are usually expressly excluded from the transaction.


DISCUSSION

We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.