Risky Business: Ignore the UK Pensions Regulator at Your Peril May 30, 2012 Philip Sutton , Partner +44 121 222 3541 philip.sutton@squiresanders.com Stephen D. Lerner , Partner +1 513 361 1220 Stephen.lerner@squiresanders.com Sandra E. Mayerson , Partner + 1 212 872 9899 Sandy.mayerson@squiresanders.com 37 Offices in 18 Countries
Overview and Highlights • Introduction to UK pensions • Value creation opportunities • Review of UK Pensions • Risk limitation strategies Regulator's powers • Tactics for dealing with UK • Analysis of overseas Plans and Pensions enforcement efforts Regulator • Reaction of the US courts • Why Squire Sanders? • Impact on cross-border restructuring and insolvency 2
Pensions Act 2004 • Established the Pension Protection Fund (“PPF”) - UK equivalent of PBGC - Sponsoring employer insolvency triggers "assessment" for PPF entry - Compensation formalised if Plan is eligible and meets funding test • Established the Pensions Regulator (“TPR”) - Statutory functions include limiting calls on PPF compensation - New "moral hazard" powers plus power to give "clearance“ - Key concept of “employer covenant” - Dual "personality" : Regulator and Determinations Panel 3
Financial Support Direction • A no fault regime • Requirement to provide financial support to plan as agreed between target and TPR: cash, shares, guarantee, security • Available if plan employer is a service company or " insufficiently resourced " - sponsoring employer value is less than 50% of its share of the funding deficit - sponsoring employer value plus connected / associated person's value is more than 50% of that deficit • Connected / associated targets include group companies and investors with one third or more of voting capital in the employer • 2 year action period (from "relevant date" or break of connection / association to Warning Notice) • Clearance available – at a price 4
Contribution Notices • Requirement to pay cash to plan • Available in relation to acts / deliberate failures to act which prejudice plan re statutory debt position or are "materially detrimental" • Also where failure to honour an FSD • Statutory defence available to material detriment CN • Targets include group companies, investors (as for FSDs) and individuals (corporate executives) • 6 year look back period (from event to Warning Notice) • Clearance available – at a price (mitigation for weakening of employer covenant) 5
FSDs and CNs: Reasonableness FSDs CNs • Relationship with employer • As for FSDs but add • Involvement with Scheme • Involvement with events • Benefit received • Failure to report a notifiable event • Financial position of target • Purposes of the act / failure to act • Likelihood of creditors being paid • FSDs / CNs : No look-back limit on reasonableness 6
Cases-to-Date Year Case Bankruptcy Process Jurisdiction(s) 2007 Sea Containers FSD Bermuda / US 2010 Bonas Group CN Belgium 2010 Nortel Communications FSD US / Canada/ UK 2010 Lehman Brothers FSD US 2011 Desmond & Sons CN UK 2011 Box Clever (a JV company) FSD UK 2012 More expected Plus numerous examples of threatened use of powers (with mixed results) 7
Sea Containers • Service company: no need to tackle "insufficiently resourced " test • Reasonable because: - Employer wholly-owned by target - Service company employed group's management - Target derived "benefit" from employer - Officers of target were trustees - Target had substantial assets - US insolvency proceedings no reason not to issue FSD • Target had "benefit" because: - Not required to pay for employer's "services" within any prescribed time - Group structure allowed to target to trade in Europe but retain advantages of Bermudan tax regime 8
Bonas • Belgian parent company CN for £5.1m (approximate PPF deficit) - Financial position - Close association with scheme - Control of Bonas - Control of pre-pack process NB TPR asked for £23m but settled for £60,000 • Director / chairman CN unreasonable - No personal benefit - Concerned with continuity of employment of staff 9
Nortel • FSD hearing uncontested (breach of stay on proceedings under US / Canadian insolvency law) • Nortel found to be insufficiently resourced • FSD reasonable because : - Nortel run as single global entity since early 1990s – "benefit" - Targets "controlled" pension contribution levels (" woefully inadequate") - Transfer pricing arrangements inadequately compensated employer for R&D, sales and marketing etc. - Targets obtained £467m interest free loan from employer which was part settled with illiquid assets 10
Lehman • Service company : no need to tackle "insufficiently resourced" test • FSD issued against 6 targets. TPR dropped claims against 29 and lost re 38 other potential targets • FSD reasonable (despite "no improper or even poor" conduct) because: - Group operated on integrated global basis – "benefit" - Payments for services were outstanding - Regular cash sweep up to holding company - Cross-border insolvency processes made FSD " even more reasonable" 11
Desmond & Sons • Single customer company lost contract • Company wound up in a way which triggered the statutory debt regime - but at a lower level (£0) than might otherwise have been the case • No dispute as to lawfulness of company’s action but plan trustees not involved in discussions and arguably “misled”. Lost opportunity to use power under rules to force enhanced debt calculation basis. • Initial TPR decision : no case to answer • CN issued against 2 directors for aggregate £1m • Appealed by directors, plan trustees and TPR - 6 yr time limit enforced against TPR re potential additional target - Full rehearing : not limited to facts and arguments before Determinations Panel at time of original decision - Scope to increase CN to £10.9m 12
Box Clever • 1999 : Highly leveraged TV rental JV. The JV’s borrowings were non-recourse against JV partners (Thorn/Granada) • JV plan established mirroring Thorn/Granada plans (but no bulk transfer of assets / liabilities) • 2000 : special dividends paid to ITV by Granada JV partner • 2003: administrative receivers appointed to JV under debenture • Deal / financial structure could not have anticipated Pensions Act 2004, TPR or moral hazard regime • ITV targets had never participated in scheme. Reasonableness turned simply on magnitude of the special dividend received by ITV as a “connected” party • Jurisdiction turned on terms of the debenture (who “controlled” the voting capital in the JV post insolvency?) • Claims of unfairness (clearance granted to Thorn) dismissed 13
Risk Limitation Strategies • If possible avoid : - UK service company structure - Owning more than one third voting capital (investors) • Understand other key risk factors - conflicts of interest - integrated global business model - intra-group financial arrangements : loans, transfer pricing, terms for services • Take care with : - acquisitions, particularly leveraged acquisitions - refinancing with security arrangements which could be prejudicial to plan - Exit / restructuring strategies • Get clearance (at a price) or take considered risk 14
Overseas Reach of TPR • Can TPR really take action overseas? - Sarbanes-Oxley : Persons outside US liable to criminal sanction from SEC if in breach - Pensions Act 2004 : Probably. Not yet tested in the UK courts - In practice, TPR is looking overseas - Not had to enforce overseas yet • Taking action involves two stages: - Getting appropriate UK Plan claim recognised in overseas jurisdiction - Enforcement if target fails to honour a successful claim n.b. may require new regulatory process to convert FSD to CN 15
Overseas Reach of TPR • Some notable successes to date: - Kvaerner (Norway) : £101m contribution plan agreed - Sea Containers (Bermuda / US) : $200m stake in JV despite bondholder objections - Bonas Group (Belgium) : £60k settlement – but hardly a ‘success’ - Chemtura Corporation (US) : £60m contribution plan plus security package agreed • Memorandum of understanding with equivalent overseas regulators 16
UK Pension Plans and Claims in US Chapter 11 Processes • Sea Containers – s362(b)(4) Bankruptcy Code automatic stay not argued • Automatic stay argued in - Visteon : successfully defeats claim - Nortel : successfully defeats claim - Lehman Brothers : expected to follow Nortel - Chemtura : claim based on contingent FSD, stay invoked, claim compromised out of Chapter 11 to the UK regulatory process, Chapter 11 process concluded, UK Regulator issues Warning Notice for FSD, deal agreed, FSD proceedings withdrawn - Chemtura - a model for future action by UK plans / TPR? Did the debtor do enough? 17
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