When should your sponsor tell you about corporate activity?
Pardon the Interruption
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Notifiable events are expected to become part of pensions regulation, but with the government unclear about this, at what point should trustees be informed of corporate activity?
The forthcoming pensions bill is expected to include, among others, a duty on companies to notify trustees of corporate any activity that affects the scheme at the point of ‘heads of terms’. The proposal has led to much debate – with some arguing that involving trustees and the Pensions Regulator at this early stage could jeopardise transaction negotiations.
The requirement was mooted following high-profile scandals such as BHS, and because it became apparent that only a small number of companies now seek voluntary clearance from TPR for their transactions.
The government has said it plans to create a notifiable events framework under which employers would need to tell trustees about the sale of a “material proportion” of the business or assets of an employer with funding responsibility for at least 20% of the pension liabilities, as well as cases where a company is granting security on a debt to give it priority over debt to the scheme.
It was originally proposed that such information sharing should happen at ‘heads of terms’, but many employers feared that involving trustees in early stage discussions would make a deal unattractive to the other party. Meanwhile, trustees generally welcomed such early involvement. The government meanwhile remained on the fence, merely saying that “there is more work to be done” in this area.
Heads of terms ‘a nebulous thing’
Richard Farr, managing director at covenant advisers Lincoln Pensions, notes that there is a lack of definition of the term ‘heads of terms’. “Heads of terms is a nebulous thing, it can range from a letter of exchange of ideas, to a legally binding ‘subject to' document, it isn’t a full document... The issue we’ve got here is very simple, how do you define heads of terms,” he observed.
Confidentiality is the other point many said would be a problem, even if this already required in many cases from trustees and the regulator. However, Farr believes that “the early stage negotiations... are sometimes quite sensitive because both sides tend to reveal certain attitudes and views which they wouldn’t share if it wasn’t for the deal."
For example, a company that is in principle prepared to sell a subsidiary for a minimum price – below which it would not transact – might find that its pension trustees would look at the sponsor relationship differently.
Such scenarios might however never materialise, raising the question whether the trustees need to know early on. “How far do you extract the emotional, commercial, common sense, wishful thinking M&A thought process into a formalised heads of terms... and then have a conversation with the trustees?” said Farr.
However, where a scheme is a large creditor and the employer has taken more serious steps towards corporate activity, it would make sense to communicate this to the trustees “as a courtesy”, he said, adding that the difficulty lay in how to formalise this process.
Farr proposes that only the chair of trustees should be informed confidentially of potential corporate activity early on, without being obliged to share the information with the other trustees; this would allowthe chair to both prepare their reaction if the situation does happen, as well as to provide a pensions perspective to the company’s board. Farr argued that the rise of professional trustees should mean that chairs are, in the main, “sensible” people who would not panic at the thought of a merger or sale.
When is the best time to bring in trustees?
Bringing in trustees and TPR at heads of terms is “unhelpful”, said Simon Kew, a director at advisory firm Deloitte, who added that trustees should be informed but not be involved in the process at that point.
Kew pointed out that M&A activity is often portrayed as a negative for pension schemes, but that it can strengthen sponsor covenant as well as weaken it.
Positive or not, the point at which trustees are informed of corporate events remains a sticking point until legislation is finalised.
Nigel Jones, a senior associate in Arc Pensions Law, said a “sensible line” would be to anchor the new notification duty by reference to clearly defined trigger events with “sensible guidance on timing” - which are expected to be post-diligence phase but prior to signing. This, he said, should make it possible to have more effective oversight without inhibiting corporate activity too much.
“It will also mean trustees have a seat at the table earlier in the process and with that, the prospect of genuine engagement and better outcomes for their pension schemes,” said Jones.
Companies involved in M&As might view the additional hurdles as unwelcome but, he noted, these “seem unlikely to present an obstacle in practice” as notifiable events are already part of the regulatory landscape, and the provision of a declaration of intent will be subject to risk-based criteria.
Sellers could even benefit from the work undertaken to comply with the new duty because it could form part of any later statutory defence if the regulator was considering a contribution notice in connection with the transaction further down the line.
How early should trustees be informed of corporate activity in your view?