Mergers and Acquisitions (M&A) Are One

Brian Richard Lenker Brach Eichler represented a purchaser in an acquisition of a Delaware corporation (target). The purchaser negotiated a letter of intent whereby the purchaser would acquire all of the target’s assets. During due diligence, we determined that the target had a defined benefit plan. After reviewing the most recent IRS Form 5500s and the target’s financial statements, we believed that the plan was overfunded. The plan documents provided for a distribution of surplus assets to its sponsor—the target—upon termination. The purchaser engaged an actuary to evaluate the funded status of the plan and confirmed that it was significantly overfunded. After carefully examining any potential liabilities of the target, we proposed a stock purchase and redemption to the target’s shareholders instead of an asset purchase. This restructuring was approved by all parties. After the closing, the purchaser caused the target to terminate the plan and satisfied its liabilities to its participants through the purchase of annuities. Once this was completed and the appropriate income and excise taxes were paid by the target, the remaining surplus funds were used to pay down the acquisition indebtedness of the target. Depending on interest rates and investment success, defined benefit plans may reveal hidden assets or liabilities on a termination of the plan, which should be evaluated when structuring a transaction.