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The following is a summary of an informal discussion of employee benefit practitioners held in Washington, D.C. on November 4, 2011. The topic concerned a case out of the Fifth Circuit, Evans v. Sterling Chemicals, Inc, No. 10-20493 (5th Cir. 10/13/11).
Dan Brandenburg, Saul Ewing LLP, Washington, D.C.
Keith Mong, Buchanan Ingersoll & Rooney PC, Washington, D.C.
Janine Bosley, Buchanan Ingersoll & Rooney PC, Washington, D.C.
Steve Pavlick, McDermott, Will & Emery, Washington, D.C.
Mr. Mong: An interesting decision has recently come from the Fifth Circuit - Evans v. Sterling Chemicals, Inc., No. 10-20493 (5th Cir. 10/13/11). In Sterling, the Fifth Circuit held that an asset purchase agreement that included a provision in which the purchaser committed to providing post-retirement medical and life insurance coverage to acquired employees at the same levels provided under the seller's plans constituted an amendment to the purchaser's employee welfare plans. According to the Fifth Circuit, as long as the agreement is in writing, it contains a provision directed to an ERISA plan, and the plan amendment formalities are satisfied, the agreement will be considered a valid plan amendment to the plans addressed in the agreement.
The amendment procedures in Sterling specified that the plan document could be amended at any time by action of the purchaser's employee benefits plans committee. The asset purchase agreement in question was authorized by the boards of directors of the purchaser and its related entities, and then executed by the purchaser's chairman.
Although the employee benefits plans committee did not take any action with regard to this provision, the court determined that the amendment formalities were satisfied. The court stated that even if the committee was the only entity expressly authorized to modify the plan under the formal plan documents, the board of directors was empowered under applicable state corporate law to revoke the delegation to the committee and authorize the chairman to amend the plan by signing the asset purchase agreement.
Mr. Pavlick: We often see caveat language in asset purchase agreements specifying that plan participants and/or employees are not intended to be third-party beneficiaries of the agreement. This language is an attempt to avoid any unintended assumption of liabilities. However, it is possible that such a provision may not be enough to protect the purchaser under Sterling.
Mr. Mong: Yes, the court noted that the asset purchase agreement did not include a limitation on the benefit continuation covenant to a specific time period, nor did it include an express statement that the agreement was not intended to modify or amend a particular plan. Because of this, the court expressed no opinion on whether such a clause would effectively prevent the amendment of the purchaser's plan.
Ms. Bosley: One interesting aspect to this case is that the purchaser had not assumed the seller's plans and that the plan in question was the purchaser's plan. This may be one of the first cases in which the agreement is treated as an amendment in the context of an asset sale in which the plan being addressed is not one assumed by the buyer.
Mr. Mong: This case can be distinguished from Tatum v. R.J. Reynolds, 2011 WL 2160893 (M.D.N.C. 2011), in which the federal district court would not give effect to an amendment removing a stock fund after finding that the plan's amendment procedures had not been followed. In Tatum, the amendment procedures required that amendments could be made by action of an employee benefits committee in writing. Although the amendment in question was signed by the secretary of the committee, the required actions by the committee had not been satisfied at that point.
In light of these cases, should a plan's amendment procedure be narrow to avoid situations like that in Sterling, or broad to avoid situations such as Tatum? Also, should benefits counsel go back and look at past asset purchase agreements? Some firms are encouraging their clients to review their past agreements for possible employee benefit covenants.
Mr. Brandenburg: Tatum might be distinguished because the committee had not followed the procedures necessary for amendment, while in Sterling, the action had been taken by the board of directors, which had a right to revoke the delegation of amendment to the employee benefits committee.
Mr. Pavlick: It is my understanding that some firms are encouraging their clients to review past agreements to see if there may be any impact on their employee benefits plans.
Mr. Brandenburg: Counsel will have to be careful in drafting these agreements in order to avoid the unintended consequences of Tatum or Sterling.
Ms. Bosley: Additionally, it will be important to follow up with clients following the consummation of a merger, sale or acquisition agreement. Individuals charged with maintaining and operating affected plans should be apprised of the impact of these agreements. In such a case, a specific amendment to the plan might be advisable. This is particularly important since, many times, employee benefits counsel is brought in at the last minute of the negotiations to review and "bless" the language. Ideally, employee benefits counsel should be brought in as soon as possible during the negotiations, instead of towards the end of the process.
Mr. Mong: Buyers should probably also avoid open-ended agreements, such as this, by restricting the benefits continuation commitment to a specific time period.
This commentary also will appear in the January 2012 issue of the Tax Management Compensation Planning Journal. For more information, in the Tax Management Portfolios, see Ireland, 360 T.M., Qualified Plans - IRS Determination Letter Procedures, and in Tax Practice Series, see ¶5520, Plan Qualification Requirements.
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